Q4 2021 Q2 Holdings Inc Earnings Call
Good morning, My name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the Q2 holdings fourth quarter and full year 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.
If you ask a question at that time simply press star followed by the number one on your telephone keypad.
Thank you I would now like to turn the call over to Josh Yankovich Investor Relations. Sir. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us for our fourth quarter and full year 2021 conference call with me on the call today is Matt Flake, our CEO , David <unk>, our CFO and Jonathan price, our executive Vice President of emerging businesses corporate and business development.
This call contains forward looking statements that are subject to significant risks and uncertainties, including with respect to our expectations for the future operating and financial performance of 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 our forward looking statements will prove to be correct.
Important factors that could cause actual results to differ materially from those reflected in the forward looking statements are included in our periodic reports filed with the SEC, including our annual report on Form 10-K to be filed this week 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 are based on assumptions only as of the date discussed investors should not assume that these statements will remain operative at a later time and we undertake no obligation to update any such forward looking statements discussed in this call.
Also unless otherwise stated all financial measures discussed on this call will be on a non-GAAP basis, 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 in our form 8-K filed with the SEC yesterday afternoon, Let me.
Now I'll turn the call over to Matt.
Thanks, Josh I'll start today's call by sharing our fourth quarter and full year results and highlights from across the business.
Then hand, the call over to Jonathan to provide more insights into the emerging businesses organization. He oversees David will then discuss our financial results in more detail as well as guidance for the first quarter and full year before I conclude with a look ahead to 'twenty two.
In the fourth quarter, we generated non-GAAP revenue of $132 3 million up 21% year over year and up 4% sequentially non-GAAP revenue for the full year was $508 million up 23% our registered user count at the end of the year was $19 2 million up.
8% year over year and flat sequentially.
Closed out 2021 on an extremely strong note and as I look back at the full year I'm proud of the way our team performed on the sales front. It was it was a year characterized by two distinct cash bookings performance. During the first six months continued to be impacted by the pandemic. However, we saw significant improvement in the buying environment in the second half.
With a solid third quarter of broad based net new activity and an even stronger finish to the year in the fourth quarter. These two quarters combined for the best bookings have in company history.
Over the course of the year, we signed nine enterprise and 13 tier one customer contracts across our digital banking and lending platforms and had strong renewal rates with all this activity, we exited the year with more than 200 financial institution customers and over 300 total customers.
On the innovation front, our teams continued to deliver new and innovative solutions.
We launched the Q2 innovation studio and added more than 50 technology partners that can drive even more engagement.
<unk> and revenue opportunities for our customers and their end users.
We also added the click switch team and solutions to our digital acquisition capabilities, which has helped us land and expand with key customers and drive more profitable account holder relationships.
And in a year in which we remain primarily remote we continued to invest in our people our culture and our brand key to our success, we exited the year with more than 2000 employees up 16% year over year and renamed the top workplace for the 11th year in a row.
We also launched our initial ESG report to provide more insight and visibility into our numerous environmental social and governance initiatives.
Last but not least we supported our customers through unprecedented volumes of digital engagement over the course of the year our customers our customers account holders logged into our digital banking platform more than 4 billion times.
Today more than ever digital tell our customers deliver their brands and interact with their account holders and we use the data from this engagement to enhance our products and help our customers operate their business.
And in 2021, we moved more than two trillion dollars.
On our digital banking platform and help lenders price approximately four trillion dollars in commercial loans today.
Today, many commercial clients expect their entire banking relationship to be digital and we believe that this data illustrates our success in digitizing, both banking and lending for our commercial customers.
These significant levels of engagement applied to our banking as a service solutions as well.
As of year end, our banking as a service platform supported more than 11 million users and processed more than $20 billion and transactions.
In total we believe the engagement we saw in 2021 illustrates how the pandemic has further accelerated a durable shift to digital across customer types and it almost all aspects of the financial relationship.
Our ability to support this level of digital engagement is the culmination of a lot of hard work from our delivery and support teams strong sales execution and our constant focus on innovation with that perspective in 2021 in mind I'd like to shift the discussion to the fourth quarter more specifically.
First we held our Investor day in December where we shared our views on the future of the industry and why we believe we are in a favorable position to capitalize on the significant opportunity.
We believe financial institutions, Fintech and brands are converging, creating a new frontier in financial services in this new frontier financial institutions will look to digitize every aspect of their business. We have deliberately assembled a portfolio of solutions designed to capitalize on this shift and believe we are uniquely positioned.
And to partner with customers across banking and lending from retail to small business to commercial.
We saw this play out in our sales execution in the quarter, where we had broad based sales success, both in signing new customers and expanding existing relationships. As a result, the fourth quarter was the second best bookings quarter in company history, and we view the accelerating sales activity as a signal that financial institutions are virtually every size or engaging in a <unk>.
Widespread technology refresh.
Meanwhile, in the new frontier Fintech and innovative brands are rapidly moving into financial services, creating competitive pressures and new business models, which we believe lead to new opportunities for partners like Q2 to leverage technology to bring these constituents together as partners we.
We do this through two primary offerings with the first being Q2 innovation studio a developer and partner ecosystem that allows our customers and partners to innovate like never before on our digital banking platform.
Second offering is our banking as a service solution, which provides innovative brands the technology and financial institution partners, they need to embed financial services into their ecosystems.
These emerging offerings gained further momentum in the fourth quarter as well we continued to rapidly add new technology partners to Q2 innovation studio and saw it contribute meaningfully to net new deal net new digital banking wins and expansion activity with existing customers on the banking as a service side, we renewed three of our five largest.
<unk> customers with multi year contract extensions reinforcing the confidence our customers have in our platform and strategic roadmap.
We also just unveiled a new brand for Q2 banking as a service called helix, which Jonathan will unpack in more detail shortly.
So now I'd like to dive a bit deeper into our sales performance from the quarter, which we believe demonstrates how the how these market forces are creating tailwind for our business.
I'll start with digital banking, where we signed a broad mix of deals, including three tier one customers. One was the top 100 U S Bank that had had used our corporate solutions for several years and renewed that agreement, while also adding retail and small business bank more than tripling the committed revenue contribution of this customer.
The second tier one deal was with a bank that is rapidly accelerating their investment in technology with a particular focus on implementing a unified platform across all channels.
Where our single platform for retail and commercial gave us a big expansion opportunity with the tier one client I just discussed here. It was a key reason Q2 was selected for retail small business and commercial functionality are continued.
Innovation on the digital banking side also gives us a broader set of solutions to provide our customers and as a result, we've seen the average sales price of digital banking deals trend up over time.
As we have mentioned before tier two deals can also carry a bookings impact similar to that of a tier one customer the second largest digital banking deal we booked in the fourth quarter was actually a tier two bank that will incorporate retail small business and commercial products and finally, our portfolio gives us.
The land key accounts with ancillary solutions. For example in addition to being included in numerous net new digital banking deals. We also booked one enterprise and for tier one click switch standalone deals in the quarter.
Landing new clients with the solutions with solutions like digital acquisition, and Onboarding or risk management is important because it helps establish a relationship with a customer and makes it easier to expand these opportunities into other areas of our portfolio over time.
Shifting to the lending side, we had meaningful activity across our loan origination and loan pricing solutions in total we signed five enterprise and for tier one deals in the quarter comprised of both net new and expansion wins on the loan pricing side or enterprise wins included a top five U S bank that purchased the full loan pricing sweet.
And a top five Canadian bank, which included winning separate opportunities for their U S and Canadian businesses, reflecting the global opportunity, we're seeing with our lending solutions.
We also had meaningful loan pricing expansion activity in the quarter and we have seen this expansion takes several shapes. For example, we had an existing client a top 10 U S bank expand their use of our solutions into a large new line of business, which grows the revenue contribution of this partnerships substantially.
We're also seeing more conventional cross sell activity, where a client starts with loan priced with a loan pricing product and then adopt incremental functionality. This was the case with an existing tier one client that started with a single module in late 2020 and purchased the full loan pricing suite in the fourth quarter.
The expansion is a key driver for our lending solutions with our three largest enterprise customers. We have seen the contracted average recurring revenue more than double in the first two years of the relationship and.
And finally, when you consider the buying.
<unk> in the enterprise segment of the market slowed considerably at the height of the pandemic, we think our success with net new and expansion sales in the quarter is encouraging and provides us with optimism around the buying environment heading into 'twenty two.
Although loan origination front, we had a particularly strong quarter of cross selling into existing digital banking customers, especially with our treasury Onboarding solution. We had five such cross sales in the quarter, including two tier one deals.
Onboarding commercial clients is a critical step in our relationship and one that had remained largely manual paper based we believe our recent success. In this area is just another proof point that financial institutions are looking to digitize virtually every aspect of their business.
Overall, we're pleased with the momentum in both digital banking and lending in the fourth quarter, we believe the quantity and breadth of these wins demonstrates our ability to serve a broad market opportunity.
We also had an exciting exciting quarter with strong activity in our emerging businesses organization and I will now hand, the call over to Jonathan to provide highlights from Q2 innovation studio in helix.
Thanks, Matt as we've discussed throughout the pandemic innovation has become critically important for financial institutions.
New entrants into this space are creating incremental competitive pressures and account holder expectations for innovative digital solutions are at an all time high.
Over the last several quarters, we shed shared stories about the Q2 innovation studio, which provides our customers and partners with API and SDK based access to our digital banking platform and in doing so enables them to extend and add new experiences to their digital banking environment faster than ever before.
By helping our customers deliver technology rapidly innovation studio can drive deeper engagement in the digital channel and add solutions that generate new noninterest related revenue.
In the fourth quarter. We saw continued success with Q2 innovation studio, adding 16, new partners to our Fintech ecosystem.
We believe that adding new partners can help us create substantial value for our customers and Q2 over time.
First the contributions from these partners provide us with meaningful cross sell opportunities with our digital banking customers. For example, one of Q2's top cross sold products in the quarter was an innovation studio partner solution and that product also yielded two of our largest individual cross sales.
The second advantage is that it can unlock verticals in which we otherwise don't currently access segments like HR and insurance for example, which we believe can open an expanded addressable market for us over time.
During the fourth quarter, we added another vertical through and investing in money management solution that we can now offer directly to our customers, allowing us to tap into this attractive market for the first time.
Finally, because of the speed and flexibility of the innovation studio provides we're seeing it create competitive advantages in the market.
During the quarter innovation studio not only helped us expand existing customer relationships, but was also included in and cited as a key reason we won roughly a third of our net new digital banking deals.
And today nearly half of our digital banking customers are using at least one of the innovation studio programs.
The convergence we are seeing in financial services is also characterized by the continued growth in innovative brands looking to add banking products directly into their ecosystems, allowing their customers to save spend and borrow directly with them in the context of the products and services they provide.
To accomplish this these brands need modern technology on which to build these products and a financial institution partner to provide the required regulatory infrastructure.
We package these strategic components in our banking as a service offering which today supports some of the most innovative brands deploying this embedded finance strategy.
We've had several recent highlights from this business that I'd like to share.
First as Matt mentioned, we announced the rebranding of Q2 banking as a service as helix on February <unk>.
We've shared our view that the embedded finance trend is growing in momentum and how important we believe the banking as a service strategy is to our future growth opportunity.
By making this strategic shift to helix, we are building a new identity in the industry a brand designed to resonate with the target market that is distinct from but leverages, our core market and a platform that allows these innovative brands to easily embed personalized financial experiences in context and that scale.
As one of the first players in the banking as a service market and powering embedded finance for some of the largest and most innovative companies in the country. We look forward to seeing the growth. This next evolution of our platform can drive for current and future partners.
On the sales side, we continue to sign net new deals and generate a strong renewal activity in the quarter signing significant renewals with three of our five largest helix clients.
Our success in this area was highlighted by a multi year renewal with our largest customer credit karma.
In a model where usage is the primary driver of scale right.
Retaining and growing with our largest clients is paramount. So we were thrilled to see such a strong quarter of key renewals.
And overall as traditional financial institutions, Fintech and innovative brands continue to converge. We believe Q2 innovation studio and helix are enabling these parties to work together for their mutual benefits, while helping Q2 build a sustainable competitive advantage.
Thank you and with that I'd like to pass the call to David to discuss our financials.
Thanks, Jonathan we're encouraged by the momentum we're seeing in the business and we're pleased with our financial results for the quarter with revenue coming in near the high end of our guidance and EBITDA well exceeding our guidance range.
I'll review our results for the fourth quarter and full year of 2021 before finishing with guidance for the first quarter and full year 2022.
Total non-GAAP revenue for the fourth quarter was $132 3 million, an increase of 21% year over year and up 4% sequentially.
Total non-GAAP revenue for the full year was $500 8 million up 23%.
Both the year over year and sequential increases for the quarter were primarily driven by an increase in subscription revenue associated with the deployment of new customers and continued organic growth from existing customers.
We ended the year with approximately $19 2 million registered users an increase of over $1 4 million users or 8% year over year and flat sequentially.
The year over year increase was attributable to strong organic user growth throughout the year and new customer go lives concentrated in the first half of the year.
Black easier accounts sequentially reflects typical levels of organic user growth combined with the slowdown in new customer installations, and known backend concentrated customer user churn.
As we've previously discussed.
We had expected a slowdown in customer installations in the second half of 2021 as a result of the pandemic impact on bookings throughout 2020, and the first half of 2021.
We anticipate this lower level of new customer installations will continue in the first half of 2022 before increasing in the third and fourth quarter driven by the bookings improvement we observed in the second half of 2021.
Transactional revenue represented 13% of total revenue for the quarter consistent with the prior year period and down from 14% of total revenue in the previous quarter.
For the full year 2021, transactional revenue represented 14% of total revenue, which is consistent with the prior year due in part to the increased growth contribution of transactional revenue generated from helix, which significantly outpaced revenue growth generated from traditional bill pay.
At our Investor Day in December we announced that we would begin disclosing annualized recurring revenue or <unk>.
The close of every year as a reminder, this metric reflects an annualized view of subscription services transactional revenue and revenue generated from Premier services at the end of the reporting period. In addition to all of the contractually committed recurring revenue in place at the end of the reporting period.
<unk> grew to $574 2 million up 24% year over year from $464 2 million at the end of 2020.
This year over year growth rate compares to a 16% growth rate observed at the end of 2020.
<unk> growth acceleration for the year was driven largely by new and cross sale bookings, particularly in the back half of the year.
In addition, we observed a growth, resulting from increasing run rates associated with existing customers.
Notably coming from our helix solutions.
<unk> was also up 6% sequentially from the third quarter numbers, we disclosed at our Investor day.
Primarily due to the booking strength, we observed in the fourth quarter.
Our ending backlog of $1 4 billion increased $121 $7 million sequentially were 9%.
And equated to a 10% increase year over year.
The sequential and year over year increases in backlog were primarily attributable to net new bookings in addition to expansion opportunities.
The sequential increase was also driven by our strongest renewal quarter in two years.
As a reminder, the biggest driver of changes in backlog are net new bookings and renewals.
Renewals are subject to seasonality as well as the number of opportunities in target.
As a result, while it's possible we could see a sequential decline in backlog for the first quarter of 2022 due to having less renewals in scope. We believe we will have a strong year over year backlog growth for the full year of 2022.
Our revenue churn for 2021 was five 4%.
Down from five 9% in 2020.
This revenue churn was slightly better than we expected at the beginning of the year based on strong renewal activity as we continue to work with our customers to broaden the solution based we provide to their end users and strengthen relationships.
As we previously mentioned.
We have historically been a beneficiary of bank M&A activity and in 2021, we saw a continuation of that trend.
Of the M&A announcements made during the year, which involved the Q2 customer or customers were the acquirer or involved in a merger of equals and over 90% of those transactions, which gives us belief that we will have potential revenue opportunities and a minimal impact to revenue churn in 2022 from recent M&A activity.
Given the anticipated exploration of our PPP solution contracts in 2022.
We expect our revenue churn levels for the year could increase modestly to around 6%.
However, this incorporates our belief that the digital banking revenue churn, specifically will decline year over year.
At the end of the year, our digital banking platform installed customer count was 448.
Down from 450 at the end of 2020.
Year over year change in customer count was associated with the increase of bank M&A activity amongst our customer base, including instances in which our customers we're acquiring existing Q2 customers.
We also had fewer new go lives take place in 2021 due to the pandemic impact on buying beginning in early 2020.
Our trailing 12 months net revenue retention rate for 2021 was 119%.
Down from 122% in 2020.
Our elevated retention rates in 2020 included the contribution from the acquisition of precision lender, which took place in the fourth quarter of 2019.
Gross margin for the fourth quarter was 51, 5% up from 48, 3% in the fourth quarter of 2020 and down from 51, 9% in the previous quarter.
The year over year increase in gross margin was primarily due to a decrease in services costs, resulting from an accounting adjustment recorded in the prior year period, which accelerated the professional services costs associated with projects in progress for our cloud lending solutions.
Primary driver of the sequential decline in gross margins was an increase in costs associated with the installation of some larger digital lending customers during the quarter.
For the full year 2021 gross margin was 51, 9%, which was consistent with the prior year.
Total operating expenses for the fourth quarter were $61 5 million or 46, 5% of revenue.
Compared to $50 1 million or 45, 7% of revenue in the fourth quarter of 2020, and $62 4 million or <unk> 49, 1% of revenue in the third quarter of 2021.
The year over year increase in operating expenses as a percent of revenue was driven primarily by the onboarding of additional team members concentrated within R&D as well as sales and marketing.
As a reminder, the incremental headcount associated with the acquisition of clicks, which were concentrated within R&D.
We ended the year with 2028 employees up from 1749 at the end of 2020.
Adjusted EBITDA was $10 $8 million.
Up from $6 $1 million in the fourth quarter of 2020, and $7 3 million in the previous quarter.
Our over performance relative to guidance for the quarter was driven primarily by effectively managing operating expenses across most spending categories.
Adjusted EBITDA for the full year was $37 $9 million.
Up from $22 2 million in 2020.
Up 70% year over year.
We ended the year with cash cash equivalents and investments of $427 7 million.
Up from $394 $6 million at the end of the third quarter.
This increase was largely a result of strong profitability and good working capital management, resulting in favorable cash flow from operations.
Our capital expenditures for the quarter were $3 7 million, our total capex spend for the full year was $19 8 million or three 9% of revenue.
Which is down from five 8% in the prior year.
In 2022, we expect our total capex cash spend as a percent of revenue to be near the low end of the 4% to 6% range. We've operated at historically.
Cash flow from operations for the fourth quarter was $39 3 million, which.
Which is the highest quarter on record.
Strength in operating cash flow was primarily attributable to increased levels of profitability, good working capital management and favorable seasonality.
As a reminder, we previously stated that the timing of an extra payroll run in Q3 of 2021 would result in more favorable operating cash in Q4.
This extra payroll cycle does come back in Q1 of 2022, which coupled with other working capital seasonality will likely result in a net use of cash from operations for the first quarter.
However, we believe we will experience year over year growth in operating cash flow for the full year of 2022.
We generated free cash flow of $33 $7 million during the quarter, resulting in free cash flow for the full year of $5 $3 million. The first time in our history generating positive free cash flow for the year.
Let me wrap up by sharing our first quarter and full year guidance.
We forecast first quarter non-GAAP revenue in the range of $131 5 million to $133 million.
And full year non-GAAP revenue in the range of $576 million to $581 million Rep.
Representing year over year growth of 15% to 16%.
As a reminder.
Due to the timeline associated with deals booked in the back half of 2021, we do not expect the revenue recognition to commence with the vast majority of those bookings until the back half of 2022.
As indicated in our guidance, we believe our year over year revenue growth rates exiting 2022 will be higher than those observed in the first half of the year.
Now we will be positioned for annual revenue growth rate expansion in 2023.
We forecast first quarter, adjusted EBITDA of $7 7 million to $8 7 million and.
And full year 2022, adjusted EBITDA of $40 9 million to $43 9 million.
Representing 7% to 8% of non-GAAP revenue for the year.
In summary for the fourth quarter, we delivered solid revenue results and better than anticipated profitability, we generated positive free cash flow for the full year and closed out the year with our second best quarterly bookings performance on record driving meaningful increases in our key leading indicators such as <unk>.
In 2022, we expect to continue to invest in our growth opportunities, which we believe position us to capitalize on our long term market opportunity in.
And with that I'll turn the call back over to Matt for his closing remarks.
Thanks, David to close out today's call I want to offer a few comments on our business outlook for 'twenty. Two first I'm extremely encouraged by the momentum with which we entered the year as we continue to monitor the ongoing pandemic and the impact of the macro economic backdrop on our customers the sales execution from the back half of 'twenty one.
That financial institutions are in a better purchasing position than they were a year ago.
One thing that pandemic is clearly underscored is that the time to embrace digital is now we.
We are entering a new frontier in the industry and as a result, we anticipate financial institutions Fintech and innovative brands will accelerate their investment and financial services technology in the years to come.
And when you consider the breadth of our digital banking and lending portfolio and our competitive advantage with Q2 innovation studio in helix I believe we are in a unique position to capitalize on the substantial market opportunity in front of us with that I'll turn it over to the operator for questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
Your first question comes from the line of Terry Tillman with Truest. Your line is open.
Yes. Thank you good morning, Matt David and Jonathan It feels like this is almost another mini analyst day lots to go over there are a lot of good stuff here and it is good to see the strength in improving bookings in <unk> I ask your questions and I don't know if this is for Matt or Jonathan bid on helix and I've got to get used to say that maybe not helix I think youll talk.
About three of your top five customer renewals were in the quarter and you did call. It credit Karma, that's good to hear but could you maybe touch a little bit more on those three renewals did they expand some of the capabilities have the registered user base has grown meaningfully and then the second part of this question is at the analyst day based on the math.
I mean, this business should be a $40 to 50% CAGR potential if my math is right by 'twenty six.
Is it a linear growth rate over time or could there be some kind of some.
Some spikes or it may not be a smooth growth rate and then I had a follow up for David.
Yeah. Thanks, Terry Jonathan So, yes, I would say in all of these cases I think this is a very good sign for us and a testament to their belief in our platform with UX.
We've seen rapid user expansion in all three examples and I think we're going to continue to see more of that and as we think about expansion of products in the roadmap I think theyre very much subscribing to what we have in the roadmap and helping guide us as to where we're going to go. So we've seen expansion products with those customers and we will see more in our belief and.
Yes, we've definitely seen user expansion, so we're pretty optimistic there as far as the growth shape of the growth I would say I wouldn't think it's linear when you think about these programs and when they launched new products. They are often starting with their first car. If it's a new debit program for example, and so the shape won't be linear, but as we launched new programs youre going to see ramping our view.
Users in transactions and that will lead to a revenue spike and then as they realize and learn who are the most active users and then continue to find ways to create more active users than they see some stability in that over time and growth over time. So I think you got to watch for new platform launches and new product launches and that'll be your indicator that the revenue and the.
The transactional growth can come behind that.
Okay. Thanks, Jonathan and then just a follow up for David.
Could you.
Touched a little bit more on how we think about the shape of revenue growth through the year I know you kind of give some qualitative commentary.
That is <unk>, the low point and kind of what that low point would be and then the second part of this on the shape of Reacceleration do you think as we go into 'twenty three.
We're comfortable with the idea of like to handle type growth, 20% plus growth. Thank you.
Yes, good morning, Gerry Thanks, and just to give you a little bit more context on that quarterly base growth rate. The first half of the year, we expect to see a similar growth rate year over year Q1 to Q2. So if you think about the 12% to 14% we laid out there in Q1, you could think about a similar type of growth in Q2, and then that accelerates into Q3 with Q4.
For accelerating growth from Q3, so we're set up well to have the FY 'twenty three acceleration in growth relative to what we said in the Investor day in December .
We're not going to give a handle yet on that but we still think that 300 basis point plus growth rate.
Acceleration in 'twenty three relative to 'twenty two is still absolutely what we're targeting.
Thank you Terry I appreciate it thank you.
Your next question comes from the line of.
Lane with Stifel. Your line is open.
Yeah, Hi, guys. Thanks for taking the question, Matt some really nice wins in the tier one front this quarter for digital banking I was wondering if you could expand on the determining factors in consideration that banks and credit unions are making the decision to go with a more modular approach for digital banking versus the full platform for retail small business incorporate and with some of that urgency.
You've talked about in your end markets are you seeing those expansion conversations take place closer to the initial land or is it largely consistent with what you've seen in the company's history.
Yes, Barbara Thanks, I would say that.
What we're facing on the banking credit Union side is a pretty simple proposition, which is either fall behind or you keep up on technology and if you think about what they are faced with.
It's a daunting task to take the lending and the deposit side of the house and automate and digitize those experiences and so when you think about the surface area that our platform and our technology covers we're able to walk into these banks and credit unions and offer them the ability to do retail small business corporate on the on both the lending and the deposit side. So.
Those decisions the way they manifest themselves are great example of that would be we have an existing customer that's about $20 billion in assets. They use our retail platform and they use another vendor for their corporate banking they called US in October and said, we need a wire system Thats Dodd, Frank compliance mobile and desktop in 90 days.
We're asking both of you to do this which one of you can do it we did that got it live in 90 days had an English and a foreign language version of it and we're able to do that because it's an on demand platform. So we on demand that wire functionality and the other vendor would've had to install a whole new wire system for them to do that so those examples.
In that timeframe are very difficult for other vendors to compete with us on so when you think about the landscape of.
The marketplace like I said, they've either got they're either going to fall behind theyre going to keep up and Thats whats driving these decisions.
And it also kind of manifests itself on the helix side of the business as well, which is they have the user experience, but they need the banking feature functionality in the partnerships that we have with our existing customers that are banks allows them to expedite the technology they get into their customers' hands as well so.
The idea of buying a standalone retail internet banking system without any commercial functionality attached to it and having to have a new system up doesn't allow you to keep up that you fall behind and so that messaging is really resonating and as you can tell with we had I think 22 enterprise in tier one wins in 2116 of those happened in the back half of the year.
Spending is opening and are opening up.
Banks and credit unions are really making these types of decisions now and they are thinking about.
The surface area that we offer and it's a much bigger solution than anybody else out in the marketplace.
Got it very helpful and then David.
Wanted to dive into the predictability and maybe you could touch on the guidance philosophy around helix in the broader transactional business.
Now some key expansions on that front during the quarter and you've had some new customers joined the platform. This year can you just go into how much or what insights do you have on the ramp of these customers in 2022 in particular and what some of the different levers for upside in the model or with that with that helix customer base. Thanks.
Yes, it's a great question because it's one that we've obviously been working on throughout the year. As these programs have started to launch and we started to get some meaningful volume out of them.
Learn from them in terms of the forecasting the seasonality around them and I think we're a lot more intelligent heading into FY 'twenty two than we were heading into FY 'twenty. One. So we do have a better handle we think thats incorporated into the guidance there is some seasonality.
As an example, some of these programs have higher higher transaction volume around tax season.
We factor that in and we're obviously going to be continuing to monitor all of these.
As they launch one and two as we start to see user growth adoption and the transactions associated with each user. So we've really expanded the models that we have around transactional to be more accurate relative to where we were a year ago and feel good about how that's incorporated into the guidance.
Makes sense. Thanks again.
Thanks Barbara.
Your next question is from the line of Peter Heckmann with D. A Davidson your line is open.
Good morning, everyone. Thanks for taking the question My first question might be for Jonathan.
How are you thinking about the opportunity around real time payments.
And the rollout of fed now are there opportunities to look at things like decoupled debit.
Some of these new programs.
Yes, I mean, its increasingly a talk track amongst our customer base and we're looking at all sorts of alternatives, both within our own innovation team as well as the third party ecosystem. So that's one area where innovation studio can come in hand, but we're looking at all sorts of options and just trying to figure out what is the fastest and most efficient way to get that solution into our <unk>.
Clients adds I don't think I have sort of a clear answer yet on a singular route we're going but it's certainly top of mind for our bank and credit Union customers today.
Okay. Okay, and then just in terms of on the lending side, we heard a lot about.
Loan pricing very strong it seems like every quarter enterprise and tier one deals didn't hear as much on the.
Former cloud lending side can you give us an update of how that business performed in 2021.
Yes.
From a business perspective keep in mind, we announced multiple tier treasury onboarding deals in the quarter, which is the cloud lending platform at work.
We're seeing success on the small business lending side with that business.
It was a tough quarter to compete with the precision lender solution. It was.
Last two quarters, they've really done a great job of getting in the enterprise.
So I don't want that noise to take away from the success that we're having with cloud lending on the treasury onboarding in the small business lending opportunities that are there so.
It had it had a strong year and I think it's just going to have a <unk>.
Even better year in 'twenty, two and beyond as the product continues to mature and we also contingent continue to integrate it into the digital banking platform.
Yes, Peter as we had a good quarter overall, once again and cross selling and cloud lending had a good cross selling quarter, there were a big contributor to that strength.
Okay good to hear thanks.
Thanks Pete.
Your next question is from Andrew Schmidt with Citi. Your line is open.
Hey, guys. Thanks for taking my questions here and I appreciate all the business details Super helpful.
I wanted to dig into the pipeline and the deal cycle. It sounds like to Tony is much more constructive in terms of predictability.
Particularly when it comes to enterprise in tier one clients, maybe you could talk a little bit about just whether we're getting back to normalization from a sales cycle and decision, making perspective, and how that might translate your visibility from a deal execution standpoint. Thanks.
Yes, Andrew I would say that it is.
It's not just tier one in enterprise the cheer, we'd mentioned that tier two deal the tier two activity on the bank and the credit Union side of the business. The pipeline. The thing Thats Nice now is we have we have more opportunity.
Opportunities, where you can have movement in a quarter, where a deal pushes out and you have enough to cover it so.
The second best bookings quarter in the history of the company and we feel like 'twenty. Two is going to continue that momentum that we had the banks and credit unions are as I said earlier thinking more strategically and trying to keep up with what's happening on the technology side and they're opening up their pocket books rising interest rate.
<unk>.
Their stocks are performing a little better the M&A activity is picking up so.
Sure.
It is returning to what we had hope the momentum we had 19 going into 'twenty, we'd get back and we're also I think.
Unfortunately, we all know how to operate in a pandemic now so.
We are seeing better activity more leads coming in and the marketing team is doing an unbelievable job of creating some demand out there for us so it feels much better going into 'twenty, two and that's what gives us confidence.
For the outlook, we have for 'twenty, two and 'twenty three.
Got it great to hear Matt I appreciate those comments and then maybe just a follow up for David on the user growth you mentioned, some backend customer churn, maybe you could expand on that a little bit in terms of what's going on and then just how you're thinking about organic user growth into 2022. Thanks, a lot guys.
Yes sure Andrew.
<unk>.
First of all what I want to comment on the revenue share number which was down year over year and as I said in my prepared remarks, we expect next year digital banking revenue churn to be down again. So obviously those are the biggest drivers that go into the financials. We do have user churn associated with that revenue churn and it just happened to be concentrated much more so into one quarter.
And then it has been in the past and is concentrated in Q4. So that was the impact that you saw in terms of the users quarter over quarter and organic user growth going forward, we remain pretty confident because what we've seen historically is a fairly tight range between nine and 11%. We remain confident that we are going to continue to see that and we do have some.
Some areas of opportunity in the M&A space as we talked about before where we're seeing our customers acquire b on the acquiring side and the vast majority of these situations. So we have opportunities there we're going to capitalize on those opportunities, but we feel if that's incorporated in that 9% to 11% that we've talked about.
Perfect. Thanks, so much David I appreciate the help guys.
Thanks, Andrew.
Your next question is from the line of Andrew <unk> with Raymond James Your line is open.
Great. Thanks, you alluded to this in your response to Andrew's first question and I can appreciate there's multiple post pandemic tailwind, but what are you hearing from customers and prospects in terms of the interest rate growth and their propensity to biotechnology and does that change at all between your digital banking lending and off platform offerings.
Yes, Alex so the customers are.
Obviously watching everything thats going on but.
Rising interest rates are inevitably positive for our for the bank and credit Union space that we're in and so I think.
You are seeing that translate into more.
More conversations more deals more rfps more activity, that's starting to take place on the business side of things and then the Fintech and the banking as a service and the brands.
There is enough activity out there where kind of this ecosystem is putting pressure on everybody. So brands are trying to figure out how to get into embedded finance fintech or partnering with brands and partner partnering with banks and banks are looking for ways to do innovative things, we had a customer a large customer rollout.
Bass initiatives on their earnings call last quarter as well so.
The activity is people are coming out of this pandemic and realizing we're going to have to operate with.
And omicron, a variant that may come up but they are realizing that the digitization of their business is critical and they have to invest in channels, whether it's for the deposit side of the lending side and we just as I said the surface area. We cover allows them to move faster and allows them to keep up and not fall behind.
Okay, great great color.
And then David I guess, just following up on your on that 9% to 11% kind of a base line user growth.
Comments, how should we think about that in terms of the split between kind of go lives benefit coming from go lives versus kind of existing expansion within your base I'm curious kind of where you've gotten to in terms of penetration within your installed base in it that can still.
At the same kind of contributor going forward now post pandemic.
Yes, what we've seen is obviously.
Over the last last few quarters, a lot of that has come from existing install base with the momentum that we've seen in net new over the second half of 2021, we certainly expect new to be a bigger contributor, particularly as we get into the second half of 'twenty, two and heading into 'twenty three.
Again, if you think about the net new bookings growth and where we've seen that acceleration in the second half there is a 12 month lag roughly speaking.
In terms of time to revenue in Windows users come online. So if you if you factor that lag into your modeling I think thats going to get you to the relative mix between the two.
Alright, great. Thank you.
Thank you Alex.
Your next question is from Dan Perlin with RBC. Your line is open.
Thanks, and good morning, everyone.
I just had a question kind of reconciling the momentum of the business and making sure I understood what David was saying about potentially seeing a sequential decline.
And <unk> bookings, so maybe I guess first if you could just help us understand kind of the dynamics at play there and what's what's happening at mix and then would you expect that if it does sequentially declined to see a more material acceleration as we go into the June quarter.
Yeah, Hey, Dan I want to be clear there is no commentary about a sequential decline in bookings I think you might have been referring to backlog.
And remember the backlog number is constitutes two key drivers one is the.
The bookings activity, so net new and cross and the other one is renewals and the renewals is a lot of that is predicated on what's in target for a given quarter and seasonality wise Q1 is typically a slow quarter for us for renewals in target and this is no exception in 2022, so we certainly.
Certainly expect strong backlog growth for the full year of 2020 to Q1 is the one quarter, where we have fewer renewals in target. So as a result, it's going to be slightly pressured relative to other quarters in FY 'twenty two.
Got it thanks for that clarification I appreciate it.
Sure that makes a lot more sense to me on.
On the competitive front, Matt we are hearing from all the big core players that they're needing to be much more component ties in modular we heard it on every one of their earnings conference calls just most recently and clearly they are behind the curve relative to you guys, but I'm. Just wondering are you seeing any discernible differences in the market, yet where youre hearing about them coming up.
Any rfps that you guys might be pushing forward. Thank you.
Yes, Thanks, Dan.
Let's just be clear.
The big three are in all the deals where they are the core processor. So we've got to compete with them on all the deals and they continue to drive.
The messaging outwardly and we continue to compete with them favorably.
But there is still a level of what actually you have in production and what you can.
What you can show them in the number of wires and <unk> and all those things that you do so yes.
Yes, I don't take them lightly they're all very good companies, but we continue to compete favorably not only against them but against the.
The point solution providers out there as well.
Okay. Thank.
Thank you.
Thanks, Dan Thanks, Dan.
Your next question is from Bob Napoli with William Blair. Your line is open.
Good morning, and thank you really appreciate really good presentation additional information is helpful.
Good to see the momentum in the business with.
The wins renewals seems like the world is back to normal knock on wood I guess.
Definitely.
Yeah.
We still can't do that.
Side of our offices, but.
And that's going to change soon I hope.
The LTV to CAC on the deals and the pricing how important is <unk>.
Pricing been or has there been if you think about Matt your business.
Over the years, how is the competition.
What is the why are you winning how much of it is price based and versus technology base and what is the returns that you're generating on deals today versus.
What you've generated historically.
Yes, I'll, let David talk about that.
So that piece of it but Bob as I as we just talked about with Dan.
If you just look at the success, we had in the quarter and the last two quarters everybody comes to the party on these deals and we are winning the big names, where everybody shows up I am confident our pipeline moving forward. It's the breadth of our pipe, it's the breadth of our products.
It's the ability to have real examples of digital transformation I gave the example earlier of.
<unk>.
Customer that needed.
Her function to 90 days and the other the other player couldnt compete at that pace. So innovation is the key to driving.
These deals and a track record of doing it over and over very important rather than a promise of youre going to do it. So we always tell people.
Youre going to believe with somebody says they're going to do is take a look at what they've done in the past and so our track record of innovation is unmatched on the digital banking side and digital lending and we intend to continue to use that as a differentiator for us as we move forward.
Yes.
Bob.
To answer the question on deal economics, and actually before I answer that question. Thanks for bringing up the deck, Josh and the team did a good job of putting that together, we want to provide you with more transparency more information. So you should expect that every quarter going forward and those that haven't seen it yet. Please go out to the IR site and you can access it on deal economics when we're.
Landing new deals that range in the margin and the margin range of 40% to 60%, but one of the things we've talked about fairly extensively in the Investor day was one of the things that we're seeing is pretty dramatic expansion over the life of that customer when we get to renewal. So when we get to a renewal the average gross margin is about 70%.
And that obviously gives us a lot of flexibility to continue to service those customers with new solutions.
And reprice it for the renewal period. So we feel really good about not only the deal economics, where we are now which have not changed dramatically, but probably more importantly, the margin expansion, we see over the life of the customer.
Yes, and Bob.
Since Jonathan is in the room I was going to have him add a little bit on emerging businesses innovation studio in particular on kind of what we saw in the quarter and the momentum we're seeing there so Jonathan.
To expand on that.
Bob Yes, I would just add to Matt and David to answer that like when you think about something that I mentioned in the prerecorded remarks as at the end of the day, but one of the Big Differentiators. We're seeing now that we didnt see necessarily have an impact just two or three quarters ago was how innovation studio is driving differentiation in net new deals for digital banking and so.
I cited in the comment that's roughly 30% of the net new wins in the quarter specifically cited.
Innovation studio as a differentiator and a key reason for select in Q2. So when you ask about sort of the competitive landscape and differentiation I just wanted to point that out because we are tracking that now and seeing it sort of pop up more frequently in a way that's I think going to help us obviously it did in Q4 and will help us going forward.
That's very helpful and just my follow up.
On the growth in revenue per user to user growth.
We've talked about earlier on this call but.
But the revenue per user I think was up 14% for the full year.
Of 2021.
And then just your thoughts the number of products each user.
And the ability to grow that revenue per user how do you think about that.
The growth of revenue per user.
While we did see we saw good user <unk> and that was it was up about $2 year over year and one of the things that we see is as you layer in there more and more commercial which is seeing a stronger growth rate than retail I don't think thats surprising.
That can that continuously helps us an exit rate that we saw in terms of <unk>.
It was above the full year right. So not only do we see momentum year over year, but we saw momentum throughout the year and again, we exited their rate that was above what you saw for the full year alright.
Alright, Thank you I appreciate it.
Thanks, Bob.
Your next question is from Matt Van Vliet with <unk>. Your line is open.
Yes. Good morning, Thanks for taking the question.
I guess following up a little bit on I think it was Andrew's question earlier about the second half bookings performance and Matt you. Obviously highlighted I think it was 22 total large deals across.
The the different products curious if you could help us think a little bit more about how many of those deals were sort of pent up demand that had been delayed in terms of decision making either throughout.
'twenty and early 'twenty one versus.
Net new opportunities coming up in the pipeline.
Later in 'twenty, one and maybe how many deals are still out there that you've had a pretty detailed discussions with customers that still or.
Hesitant to make a decision that you could see come through an earlier 22.
The pipeline.
Yes, Matt Thanks for the question.
And.
I'll take the Liberty I think what Youre asking is did we empty all of our bullets in the quarter from the backlog that was there do we what's the confidence in the pipeline moving forward and I will tell you that clearly theres. Some theres. Some built up demand that's occurred but I feel very good about the pipeline in Q1, and Q2, which is the kind of the visibility you have in full year.
'twenty, two as well I think youre going to see a very.
Very strong bookings year for 'twenty, two coming out of compared to what we had in 2021. So there's there's more deals out there the pipeline continues to grow.
The number of deals we have we're not as it's not as tight in the quarter as it has been in the past where you have to land them. So we have multiple deals that may move in and out of the quarter Theres always seasonality to Q1 and I think we.
We will see a little bit of that but I feel very good about the pipe where it is now both on the bank credit Union and the helix side of the business as well so.
Sure some pent up demands out there, but that pent up demand is.
It is going to be able to propel us for a while because theres a lot of decisions that were delayed due to this pandemic and then the catalyst for more decisions has been the demand on the digital channels and so now they're coming to talk to us about upgrading their technology. So it's a perfect storm to some extent of what's happening and we feel really good about 'twenty two and beyond.
Okay very helpful and then David as we look at sort of the overall opex curve here.
Maybe even including cost of sales within it.
You've been making a lot of investments to sort of scale the business be ready to capture a renewal in demand from the end market.
But I guess where are we in terms of some of those step function investments.
And as we see growth Reaccelerate should it should it potentially provide even more leverage on the margin side.
Or would you expect to continue to reinvest any upside that you see relative to your typical EBITDA expansion on an annual basis.
The answer is yes, I mean, we do think as we see the revenue growth accelerate throughout the second half of this year.
We'll see some margin expansion. So that's something that is to your point, we have been investing and we feel like we are going to get scale and we are going to get efficiencies. However.
However, we are going to continue to invest in the business as well, but we feel like as we see that accelerated revenue growth.
The efficiencies are going to slightly offset some of those investments and you will see margin expansion in the second half.
Alright, great. Thanks for taking my questions.
Thanks, Matt Thanks, Matt.
I would now like to turn the call back over to Matt Flake CEO to close the call.
Yes. Thank you and thank you everybody for attending today, we certainly are pleased with the results for Q4 and very optimistic about 'twenty two and what's ahead for us. So thanks everybody.
Hopefully talk to you during the quarter.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
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