Q1 2023 Q2 Holdings Inc Earnings Call
Good day, everyone. My name is Lisa and I will be your conference operator today at this time I would like to welcome everyone to the Q2 Holdings first quarter 2023 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 and if he would like to ask a question you May press star one on your telephone keypad to remove yourself from the queue that is star one again.
I would now like to turn the call over to Josh Yankovich Investor Relations. Please go ahead Sir.
Thank you operator.
Afternoon, everyone and thank you for joining us for our first quarter 2023 conference call with me on the call today are Matt Flake, our CEO , David <unk>, our CFO , Jonathan Pryce, our executive Vice President of emerging businesses, corporate and business development and our newly appointed President Curt Coleman, who will join us for the Q&A portion of the call.
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 and for the financial services industry.
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 copies of which may be found in the Investor Relations section of our website, including our quarterly report on Form 10-Q filed today and subsequent filings and the press release distributed this 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.
Mr 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. This afternoon.
We've also publish additional materials related to today's results on our Investor Relations website, Let me now turn the call over to Matt.
Thanks, Josh on today's call I will share our results and highlights from the first quarter I will then hand, it over to Jonathan to provide more insights into our emerging businesses activity before David discusses our financial results and guidance in more detail. However.
However, before I dive into the quarter I wanted to spend a few moments sharing our high level perspective on the regional and community banking space over.
Over the past two months, we have spent a lot of time with our customers we partner with a diverse mix of banks and credit unions that represent many different geographies and sizes and in general the vast majority of them report that they believe their businesses to be healthy and that they have not been meaningfully impacted by the recent challenges affecting a select number of.
Banks, which aligns with the survey results and research findings that others in our sector have sided in recent calls.
Moreover, we believe that banking is going to continue to be done digitally and the financial institutions will continue to invest in upgrading their technology to compete in their markets and serve their customers more efficiently.
What part of the results from the first quarter, we delivered strong growth in subscription revenue, which was up 19% year over year. As a reminder, subscription revenue, which is driven by our long term contracts is highly predictable and our largest and highest margin revenue category.
Therefore, we believe it is an important barometer of the health and outlook of our business.
In total we generated non-GAAP revenue of $153 $1 million up 14% year over year, and 4% sequentially and on top of accelerated subscription revenue growth. We delivered increased profitability results with adjusted EBITDA of $16.5 million or 11% of revenue and.
In recent months, we've talked about managing the business with an increased focus on profitability and our adjusted EBITDA results from the quarter underscore our ability to continue executing on that strategy.
On the sales side, we drove strong bookings growth for the second straight quarter and had our best digital banking bookings quarter ever we delivered record when rates across a broad mix of deals large and small bank and credit Union retail small business and commercial.
Competition for these deals are highly competitive and range from point solution startup to the core companies and payment processors and.
I'm proud that almost 20 years into this business, we're still winning on innovation user experience and our Singleplatform approach.
We continued to win up market, signing three new tier one digital banking customers, including two top 100 U S banks and a top 100 use credit Union.
One of these deals highlights the value of our Singleplatform approach the bank came to us for small business banking, but upon seeing the rest of our portfolio purchased a whole suite from retail to small business to commercial and more making this a top five all time deal in terms of IRR.
In my view the current focus on deposit growth is partially to thank for such a strong sales quarter as.
It's driving increased demand as prospects look to upgrade from legacy technology in order to win new customers and retain deposits.
And our platform gives them a single efficient best in class solution with which to do that.
The current focus on deposit is also generating interest in our relationship pricing solutions, where.
Where we believe we have a strong second half pipeline.
This is because in addition to pricing new loans financial institutions use the solutions to get the most out of their existing portfolios and more effectively priced services on the deposit side of their commercial relationships.
In total our sales execution and strong financial results from the quarter underscore why we remain confident about the fundamentals of our business demand is strong we're competing better than we ever have we are accelerating subscription revenue growth and we are demonstrating our ability to drive improve profitability and finally before I turn the call over to Jonathan.
I wanted to pause and congratulate Kirk Coleman, who we recently promoted the president Kirk spent his early career at Accenture, where he specialized in banking and digital transformation.
He began his journey with Q2 as an executive at one of our large regional bank customers.
In December 21, he joined our team is chief banking officer.
He is overseeing our product marketing and strategy functions in that time, he brought a deep empathy and understanding of our customer's businesses and the financial services industry in general to Q too.
And has played an instrumental role in interfacing with customers and guiding our teams in his role as president he will become responsible for scaling the operations of this business from sales and customer relationship management to product development delivery and support while I remained focused on areas like culture strategic direction and discussions with key customers prospects and.
Investors I'm excited about his skill set his passion and his deep management experience and I look forward to partnering with him to capitalize on the opportunity in front of us.
Now like to turn the call over to Jonathan to provide updates and highlights from the first quarter for our emerging businesses.
Thanks, Matt.
I'll start with Q2 innovation studio, which has continued to see strong adoption from both partners and customers.
When we launched our vision was to create a best in class partner ecosystem that would allow third party technology to easily integrate into our digital banking platform and in turn give our customers the ability to seamlessly add those partners into their digital channel and a fraction of the time of traditional delivery.
And doing this Q2 innovation studio would provide financial institutions, the ability to save costs associated with traditional technology partnerships add solutions that drive non interest fee income and ultimately drive deeper broader engagement with our account holders.
Today, we are several steps towards achieving this vision.
We have driven customer adoption with more than 300 of our digital banking customers, representing approximately 16 million users now leveraging queue to innovation studio.
And we have scaled the partner ecosystem with more than 120 available technology partners.
The last piece of the model is end user adoption and in the past 12 months, we have more than doubled the number of users actively using our partner solutions driving high margin revenue to Q too.
That said, we believe we are still in the early innings of end user adoption.
We are pleased with the progress to date and are seeing queue to innovation studio drive real meaningful outcomes for our customers.
Take the story of a roughly 500 million dollar bank in Tennessee.
To differentiate themselves and their market they set an aggressive innovation roadmap, but couldn't deliver against it quickly enough through conventional delivery channels and like many regional community financial institutions lack the technology resources to take on the work themselves.
In the last 12 months. The bank is added six new solutions using Q2 innovations studios partner ecosystem from credit scoring to a residential mortgage offering to an AI chatbot.
And they have told us they expect to drive over $1 million and combined revenue and cost savings from these solutions and 2000 twenty-three alone further strengthening their relationship with their customers and with Q too.
In this environment, where financial institutions are looking for ways to deliver innovation more efficiently retain and grow customers and deposits and uncover new revenue opportunities Q2 innovation studio provides an especially compelling value proposition.
Because of this we believe it's a key reason, we're seeing record when rates and digital banking.
<unk> has been the case for several quarters Q2 innovations studio was cited as a key reason we won in a majority of our digital banking deals. This quarter. It was cited in roughly 75% of our wins.
Moving to helix, we had another strong quarter of renewal activity signing two of our largest customers to multiyear deals with these renewals nine of our 10 largest customers have sign multiyear extensions with us in the past 18 months.
Multi year renewals such as these demonstrate the confidence our customers place in us and provided an important base as we seek to grow and drive improve profitability of helix in the years ahead.
And the current backdrop as creating opportunities to deepen and grow our relationships the flexibility of our technology and our deep direct partnerships with our sponsor banks help us move quickly to support our customers as their goals and operating environments change.
For example, during the quarter, we work closely with one customer who after March 9th needed to quickly connect certain capabilities to an alternative bank, we help them find a solution and leverage helix technology to solve their problems inside of 24 hours and we added roughly 300000, new users in the process.
As far as the demand environment. We believe we have a solid pipeline for the remainder of the year and the companies and our target markets remain committed to pursuing embedded finance strategies.
With the current prioritization of customer retention and deposits across the financial services landscape embedded finance is a powerful way for customers and partner banks to grow deposits and.
Helix has a proven differentiated offering that's already supporting more than $14 million end users across our customer base. Thank you and with that I'll pass the call to David to discuss our financial results and guidance in detail.
Thanks, Jonathan at the start of the year, we communicated our focus on delivering accelerated growth in subscription revenue, coupled with a meaningful improvement and adjusted EBITDA and cash flow.
We are extremely pleased with the progress we've made on these priorities in the first quarter.
We increase the growth rate of our subscription revenue and built on our bookings momentum with a record performance and digital banking, we delivered better unexpected revenue and adjusted EBITDA. In addition to generating better than expected cash flow from operations for the first quarter of the year.
We also took proactive action to reduce our total debt balance through the repurchase of 171 million a longterm convertible debt at a meaningful discount to face value, reducing our total face value of that by approximately 26%.
With that I'll begin by reviewing our results and conclude with updated guidance for the second quarter and full year of 2023.
Total non-GAAP revenue for the first quarter was $153 $1 million, an increase of 14% year over year and up 4% sequentially. The.
The year over year in sequential increases for the quarter were primarily driven by growth in subscription based revenue, which was up 19% year over year and 7% sequentially.
The year over year acceleration subscription revenue growth was primarily attributable.
To the deployment of new digital banking customers.
In addition, the year over year in sequential acceleration subscription revenue growth was driven from incremental revenue associated with crossover solutions and organic growth.
Our subscription revenue for the quarter was 75% of our total revenue up from 72% of total revenue in the prior year period, and 74% of total revenue in the previous quarter.
Due to the strength we've observed in our subscription base bookings, we continue to expect our full year 2023 subscription revenue will accelerate from the growth we observed in 2022.
The strength and subscription revenue was partially offset by continued weakness in services and transactional revenue.
Services revenue was up 5% year over year, while transactional revenue was down 5% year over year.
Matt mentioned, we believe developments over the past couple of months will result in lower professional services revenue the anticipated for the remainder of the year.
As a result, we're modifying our expectations were professional services engagements associated with projects that are more discretionary in nature.
Child further discuss with our updated guidance.
Transactional revenue represented 11% of total revenue for the quarter down.
Down from the prior year period of 13% and consistent with the previous quarter.
Both the year over year and sequential decline and transactional revenue are in line with the trends we started to observe in the back half of 2022.
During the quarter, we added approximately 400000 users to our digital banking platform.
Ending the quarter with approximately 21.5 million registered users an increase of 9% year over year.
Year over year in sequential increase was largely driven by organic user growth.
Annualized recurring revenue or.
Grew to $672 $7 million up 13% year over year.
Our subscription.
Growth for the quarter was up 17% year over year, driven largely by net new deals within our digital banking business and indicating continued strength in this important part of our business.
Within.
The growth in subscription revenue was partially offset by declining transactional revenue in a moderation of growth and services driven.
Driven by lower professional and consulting services.
Are ending backlog of over $1.5 billion increased by $38 million sequentially or 3%.
And equated to a 10% increase year over year.
Year over year increase was attributable to strength and net new bookings, including our largest ever digital banking booking quarter.
The sequential increase was also driven from strong renewal performance as.
As you mentioned previously while sequential change in backlog may fluctuate quarter to quarter based on the number of renewal opportunities available within a given quarter. We continue to believe we will show an increase in backlog for the full year.
Gross margins, where 54% for the first quarter.
Up from 51.4% in the prior year period, and 51.5% in the previous quarter.
The year over year in sequential improvement in gross margin was driven primarily by a favorable mixon revenue towards our higher margins subscription based business. In addition to cost efficiencies within our delivery and support operations.
As a reminder, we had a mutual contract termination in the fourth quarter of 2022, which negatively impacted gross margins by 150 basis points for that time period.
Total operating expenses for the first quarter was $72.5 million or 47, 4% of revenue compared to $65.7 million or 48.9% of revenue in the first quarter of 2022 and $72.7 million or 49.5% of revenue in the fourth quarter of 2002.
Me too but.
Decrease in operating expenses as a percent of revenue was driven primarily from improved cost scaling to revenue within sales and marketing as well as additional cost efficiencies realized in our research and development expense through the effective utilization of our global workforce and enhanced productivity.
Sequential decline of sales and marketing as a percent of revenue was also a result of a decrease in marketing events when compared to the fourth quarter of 2022.
And May we will have the return of our in person annual client conference connect.
Where we will have over a thousand guests from our customers and partners in attendance.
This event will incur additional sales and marketing expenses of almost $2 million in the second quarter and is reflected in our second quarter guidance.
Total adjusted EBITDA was $16.5 million for the first quarter up from $8.1 million in the prior year period, and eight $4 million in the previous quarter.
The year over year, and sequential change and adjusted EBITDA saw a meaningful benefit from the improved mix of higher margins subscription revenue.
Cost effective utilization of our global workforce.
Broad based efficiencies across the organization.
With the sequential change also benefiting from lower contractor related expenses.
We ended the first quarter with cash cash equivalents in investments of $271 $7 million.
Down from $433 $4 million at the end of the fourth quarter.
The decrease in cash was primarily a result of the use of over $149 million for the privately negotiated repurchase of approximately $171 million of convertible debt.
In addition, we paid the remaining $11 million in principle amount of our convertible debt, which matured during the first quarter of 2023.
While our first quarter typically reflects a use of cash from operations based on the timing of our annual bonus payout in the first quarter of 2023, we generated positive cash flow from operations of $3.9 million due to improve profitability and strong working capital management.
We believe our continued focus and actions driving higher profitability and working capital management will translate into continued strength and our cash flow conversion for the remainder of the year.
Let me wrap up by sharing our second quarter and updated full year guidance.
We forecast second quarter non-GAAP revenue in the range of $153 $1 million to $155.1 million in.
Full year non-GAAP revenue in the range of $618 million to $630 million, representing year over year growth of 9% to 11%.
As I mentioned previously while we continue to expect an acceleration in full year subscription revenue growth as compared to the prior year are updated full year guidance reflects a reduction in our expectations with respect to lower margin discretionary services revenue, which has an immediate revenue impacts.
We forecast second quarter, adjusted EBITDA, a $14 million to $16 million.
And full year 2023, adjusted EBITDA of $67 million $71 million, representing approximately 11% of non-GAAP revenue for the year.
We've raised our full year adjusted EBITDA guidance, because we believe that despite expected revenue headwinds within services revenue or increase mix of higher margins subscription revenue streams combined with cost and efficiency initiatives implemented over the past few quarters will generate adjusted EBITDA results exceeding our prior.
Expectations.
In summary for the first quarter, we delivered revenue and adjusted EBITDA results above our expectations and an acceleration subscription IRR driven by record digital banking bookings.
We generated positive operating cash flow and what's typically a seasonally challenged quarter for us and reduced our debt balanced primarily through the repurchase of convertible debt at a meaningful discount.
We're revising our revenue to incorporate lower discretionary services revenue concentrated in a few larger customers and we continue to remain confident that the increasing contribution of subscription revenue and improving cost efficiencies will allow us to continue to deliver sustained growth and margin expansion in 2023 and beyond with.
That I'll turn the call back over to Matt for his closing remarks.
Thanks, David and closing I want to reiterate my confidence in our business, our products and our ability to drive long term value creation. Despite.
Spotted the disruptions in the banking space, we continued to drive acceleration in subscription revenue growth and delivered strong non-GAAP profitability results. We also had a record first quarter in terms of digital banking bookings building on our momentum from a strong second half of 2022.
And in this environment, where financial institutions are focused on customer retention and growing deposits, we're seeing record when rates and levels of demand for our digital banking solutions, which are proven to help financial institutions Nguyen and retain new customers.
I also want to emphasize my confidence in the long term importance of regional and community financial institutions. There have always been big banks, but community focus banks and credit unions have always offered in agility and localized products and services that set them apart.
Today by being able to level, the playing field with technology I believe there is viable competitive and crucial as they've ever been.
Community banking is integral to our economy and our way of life, we <unk>.
Expect that to remain true long past, what we believe will be a temporary disruption we're seeing in the market and our products have never been more important to our customers and they are right now thank you and with that I'll turn it over to the operator for questions.
Thank you once again, everyone that is star one on your telephone keypad to ask a question.
We'll take our first question from Alex Tyler with Raymond James.
Great. Thank you, Matt another really nice subscription bookings quarter I, just wanted to start with the demand environment broadly and specifically the linearity of bookings in the quarter kind of before versus the after the kind of early March.
Some of the bank failures, I know booking them normally bank of the quarter waited, but anything the flag in terms of per cent of bookings that came in the final few weeks March historical thanks.
Yeah, So I'll answer the bookings question. Thanks, Alex.
It was 35% of the bookings came after March 10th So March 10th of the Silicon Valley Bank situation.
So.
The momentum continued and that kind of build on the demand environment comments right. Now if you think about right now we had record bookings digital banking bookings in the first quarter. After typically you record bookings for the company in the fourth quarter of last year, and a really strong second half of the of the third quarter, So two and a half quarters, a really strong bookings.
And the demand the pipeline is strong still.
RFP activity is up 40%.
From the prior quarter and the prior year and we're just seeing a tremendous amount of demand for these products I would tell you that.
If you think about what's gone on prospects of ours.
Customers that have opened accounts at other banks because of the insurance.
The insured account situations.
Getting to see the big for technology and when they look at their existing legacy Tech the banks come back to us and say, we need a modern platform that works on mobile phones and tablet is full feature functionality retail small business and commercial banking and it really is driving a lot of demand in the pipeline for us so.
It takes a little bit to get your arms around that and the environment with the news around communion regional financial institutions, but the demand environments as strong as it's been in a long time, we feel good about opposite R. When rates are as high as they've been in a significant period of time.
It is it.
Okay.
That's a really good flag on on.
The big bore kind of tech competition kind of driving demand for your customers.
I guess, David just one follow up for you I appreciate the color on subscription bookings that that's a good call out.
Is there anything that changing in terms of your ability to hit the kind of ruled 30 outlook exiting last year, just given the change in discretionary revenue.
Not not at all outs in fact.
One of the things that we talked about.
When we had our call three months ago was the fact that.
There is flexibility in that model that rule of 30 concept rule of 40 concept, obviously provides us some flexibility and we can modulates.
Either one of <unk>, depending upon with the market gives us. Some one instance in the things that we can controlling costs and the other.
So we feel really good now about our ability to continue to deliver on.
The combined EBITDA as well as growth rates as we as we get towards the end of 2024 I'll give you. An example, this year if you remember when we gave our guidance originally we worried about 21% to 22% in terms of those two metrics combined we.
We came down with our growth revenue growth rate based upon discretionary services, but with our increase in EBITDA guidance, where roughly in that same range. So it's an example, this year of our ability to modulate our ability to execute on those things that we control, which is costing the Simpsons and we think we're going to be able to continue to do that to 24 and hit that rule 30.
Alright, Thank you both for the color. Thanks.
Thanks, Alex.
We'll take our next question from Andrew Schmidt with Sydney Global markets.
Hey, guys. Thanks for taking my questions and our current aggressively new rule great to see.
Great to see the resilience and the demand environment, something we kind of thought about it a lot as well, but maybe to put a complaint on it since you serve migraines <unk> across <unk>.
Banking decent lending you talk about if there are differences in and demand pipeline sales cycles across whether it's different types in size or.
For an asset size institutions and then maybe.
Maybe as a quick follow up to that comment and just the overall health of your cost.
From her base since it sounds like you've touched a lot of customers what you're seeing there.
Anything in those funds will be helpful. Thanks, a lot guys.
Yeah sure Andrew I would say.
Welcome to Kirk as well really excited to have him on board or have them as the president.
From my.
It doesn't matter right now, whether you're a tier three tier two or tier one customer the thing I think thats differentiating as the ones that are thinking about using technology as a way to compete and differentiate and that's where we're seeing the demand come from obviously the ones that [noise].
Not have have as a strategic of a view as our customer base of the prospects that are out there.
Art and play, but the ones that we've always.
Gravitated towards are the ones that have.
Strategic view and we have a long term view in the marketplace. So it's it's been a.
The demand has just been strong in all three categories tier three tier two and tier one and the second part of the question was around.
The health of the customers, we talked about it a little bit I think all of the.
The core processors and everybody I've talked about.
The edge cases that occurred here, whether it's business model runs on the bank poor management. Those are urged cases, the vast majority of our customers bank individuals small businesses medium sized businesses main street lenders and depositors' and those folks just they didn't see what these.
Other financial institutions that have trouble.
We have seen and so it's it's a matter I think we have to get through this storm and then we will realize that these guys are a critical part of the economy, there where job growth comes from where entrepreneurship goes so.
We believe we have a very healthy customer base. The Bower ratings are all strong on our customers of course, you're going to have some of these education that occur, but we feel really really good about the health of our customers. We have a broad and diverse set of customers that are both credit unions banks big small mid sized and banking a lot of different businesses. So feel really good about the customer health, it's just going to take a little time for people to get comfortable with it.
Super helpful. Thank you are going to commentary Matt.
And then if they could ask about this the just on the cost side of it.
Great to see the.
Yeah EBITDA performance for the full year, despite the top line.
It looks like there might have been some cost efficiencies they were accelerated or <unk>.
Better execution. There you can just talk about what kind of cost efficiency benefits.
R for this year and then what's the opportunity for teen kind of incremental benefit from those because they know you do have a number of things going on.
Any context and the cost would be helpful. Thanks, a lot.
Yeah sure Andrew.
This is something that we started last summer.
It's not something that we've implemented over the course of the last few months and we've just been building on a lot of those initiatives that we put in place about nine to 10 months ago.
I'll give you. An example of some of those that are having the biggest impact. The first is utilization of global resources and more effective manner, we're doing that across many areas of the business and we're finding not only is it is it helping us in terms of our cost profile, but it's also helping us in terms of the overall output we're.
We're seeing really high output from the teams that were utilizing overseas, we are continuing to invest in those areas.
And we found it to be highly effective across the board we've.
We've looked at our facilities footprint exiting last year, we've continued to execute on that in terms of reducing the overall footprint you see about a three three and half million dollar impact this year relative to last year in terms of some of the actions. We've taken there we've got more aggressive in terms of our ability to consolidate vendors and drive costs out from a procurement standpoint.
And then we're using automation and everything that we possibly can to improve a lot of the processes that we have and as a result the cost.
As an example in our customer care, we're using AI to help us better understand customer behaviors and drive a lot of efficiencies. There. So there's a lot of that that's embedded in different areas of the business that are driving incremental areas of productivity and thats translating to call. So as we're growing the business, we're not having to add heads and in some instances.
As we May have somebody leave the company went off the backfill those rules and so we feel really good about what we've seen in the first quarter in terms of our cost profile and obviously, we have confidence that we're going to be able to continue to do the same thing going forward for the next three quarters, which is the result of the increased guidance and EBITDA.
Got it. Thank you very much David appreciate the comments.
Thanks.
We'll take our next question from carrying Tilman with tourists securities.
Yeah. Good afternoon, Thanks for taking my questions and I appreciate all the color and I saw on the booking I guess, maybe I don't know if this is for you Matt or kirchen is hurt can I answer questions. If we asked him a question or I don't want to put him on the spot, but I just wanted to kind of know that before I unleashed my questions here I'm here Terry He can answer your question.
Okay, Alright, well and I don't know if this is more for Matt right now, but I'll, let anybody just pocket or even David but you guys every quarter for a number of quarters have been talking about these digital banking ones, where it's commercial and small business banking I mean definitely something's a foot I know you'll have been working on this for years in terms of heartening that platform, but what I'm curious about is.
Is that a lot of legacy replacement opportunities and just kind of where do you think we are on the earnings of that and where have you gotten to in terms of being able to scale to the <unk> you know.
Much larger banks in terms of managing Treasury in commercial banking services, and then I'd follow up.
Yeah, I'll comment on the [noise].
The success in small mid sized commercial banking.
Sometimes I have to remind people that our first line of code that we wrote in 2004 had acha wires tax payments and entitlements built into it but about 12 years ago, we made a significant investment into <unk>.
Treasury and commercial banking capabilities, which takes you up above small business and what we learned during that process. As you can write the software and you can deliver the code, but the experience around delivering the software converting.
Legacy systems provide.
Providing a support infrastructure around most customers and integrating into the systems that are different than retail is it takes a long time.
And as we've shown you over the last.
Since we've gone public and 14.
More than 75 customers above 100 above $5 billion in assets were really moving into that into that area, where we can handle larger commercial customers and that that success over the last couple of quarters is about a product that is very difficult to compete within the marketplace. If you're a legacy tech player that hasn't been able to modernize your tact, where it works on <unk>.
Mobile phones in tablets and has a sleek user interface and also is able to integrate.
To the to not only the commercial systems, but the retail systems and then if you're if you're down market and you don't have any experience converting a 10 15 $20 billion bank off the systems, they're not going to take the chance.
With their crown jewels to go to somebody who's never done it before and so we're in a really unique spot they're competing with these legacy players. It's all legacy Tech out there on the commercial side Terry in some cases 20 535 years old is what we're talking about as far as some of the even older than that some of the systems that they're using so feel.
Really good about the demand environment, there and doing well. So that's it's a good place to be and I think you're going to continue to see that success through this year.
Hopefully beyond that.
That's great to hear and I guess, maybe Kirk to go ahead and put you on the spot then.
And congrats on the new role, but you are a former Technol a bank technology executive is you've had some time in Q.
Q to what products are kind of market opportunity do you think is maybe a lease understood or under appreciated. Thank you.
Okay. Thanks, Terry appreciate the congratulations I'd kind of 0.2 different things just to double down on some of what Matt was talking about the difference between just kind of a regular business account and Treasury management services is pretty substantial in terms of the complexity of actually delivering that and scaling it in a way that's that's really important.
Not just for the largest institutions, but also for small institutions, who are serving very specific segments and that sort of thing and it takes a lot of at bats to get really good at that cause you have to see all the different varieties, we have a really wonderfully diverse.
Set of customers and so that gives us a lot of different.
Things to work on with them.
And so that builds up over time, I think that's probably not as appreciated.
From the outside as what we see on the inside and the amount of investment that we've had to make overtime that also bridges over into things like our precisionlender.
Product right, which is now transitioning fully into both sides of the balance sheet, where we have treasury premium pricing capabilities.
Capabilities, which in this environment of course is just critically important in terms of pricing not just the loans with the deposit relationships and all of those treasury relationships will just kind of remember that on the deposit side of the balance sheet. The real money is made when you can charge for treasury services, so getting that really right.
And being able to customize it particularly for your larger customers and Super important. So I think that would be a an arena Terry that I would 0.2 sources I think the amount of R&D that had to go into building those kinds of products is probably not as well understood as as we might like.
That's great. Thanks, a lot.
Thanks to Eric Baxter.
We'll take our next question from Bob Nepali with William Blair.
Hey, good afternoon.
Shattering for Bob.
In terms of the first question could you just talk a little bit more about that decision structurally it's a break out the president and C. R O and how we should think about the impact if any towards that in terms of Tutus court strategy and go to market.
Yeah. It won't have any any impact on our go to market. It just deepening leadership bench.
Opening up the room for more voices and perspectives, which is a valuable thing for us to do at this stage in scale and the company and its focusing leadership on both the strategic and the operational sides of the business execution is critical to us our customers want to see it I want to see it in my board wants to see it the shareholders do and I think with Kirk leg laser focused on the operational side of the business and me working.
With him to help them in any way I can and him providing help for me and the team on the strategic side.
It was it was.
Natural time for us to do is decide size and I'm excited about Avenue.
Thanks, I appreciate that and then just a quick follow up I'm, just thinking about capital allocation M&A could you.
Talk about your current appetite.
Iron environment, and if you start starting to see more attractively priced assets.
Things that you potentially interested in in terms of product oriented capabilities or others.
Yeah.
Jonathan I would say, we're starting to see the flow of inbound opportunities, but candidly the quality of the assets and the value expectations aren't where we'd like them to be are we expect them to be as we get towards the end of this year and into next year and that that that has taken longer but to be fair. There has been a lot of other macro events that have occurred that might've delayed that from happening.
<unk>. So we are seeing more inbound activity from the corporate standpoint, but again now.
Nothing that has excited us or got us to a point of action and candidly I think we're in a moment in time, where we have to be pretty prudent when it comes to capital allocation given.
The scarcity value of cash and we have a good amount to be competitive incredible in these discussions and so we just have to be smart about doing the right deals and so that's sort of where we sit today on the corporate upfront.
I appreciate the comments.
Thank you thanks.
Our next question comes from William Macnamara, with B T I G.
Hi, Thanks for taking my question just kind of wanted to know how you guys are seeing current demand from customers for more automation or AI capabilities.
Kirk in particular, Yeah, Hey, William Thanks for the question.
It's early right, we're not even in the first inning, where in the first pitch of the first inning. When it comes to Canada, where we are in the evolution of AI. We're excited about the potential that it has for positively impacting our business and our products.
But having said that risk management information security compliance privacy are all really important concerns. So we're.
Looking at all of those aspects as we think about how we can move forward certainly it's a conversation, we're having with our with our customers and.
I would say just stay tuned done on with some of the possibilities are going to be.
Great. Thank you.
As a reminder, everyone that is star one on your telephone to ask a question.
Take our next question from Parker Lane with steeple.
Hi, guys. Thanks for taking my question wondering if you could talk a little bit more about the discretionary services spend in the headwinds are facing there I think we've talked in the past about back office automation staff augmentation efficiency projects being the areas that people are looking to trim right. Now is largely the same tune on that front or or or.
Using incremental challenges different areas and.
Types of projects scope of the work you know coming in and compressing here.
Yes, I know Parker you answered it for me, that's the thing and staff augmentation efficiency projects, where you're driving you may have a double cost for a period of time, but you're gonna save money in the long run when March 10th happened everybody just kind of took a pause and a break and said we're gonna have to evaluate what's coming down the pipe on discretionary spending so.
That's what it is there there's no change is march 10th at at a different level of it for us and so you know, it's it's something that when you have a bunch of big customers. It's something that comes along with the territory, but the subscription revenue. Obviously, we were really pleased with the results from that and we continue to be pleased with that.
That a lot of revenue but.
We'll get through this discretionary spending.
They'll pick it back up at some point, but right now it's just a matter of.
They are trying to sit back and watch what's going to happen.
Yeah I appreciate that Mat and then we've often talked about M&A being a tailwind your story I think historically, you're on the right side of M&A with the recent developments that we saw in March and subsequent events has that had any impact on the M&A approval pipeline.
Are you thinking about that generally throughout twenty-three.
Yeah, clearly, especially after coming off TD and first horizon that deal that doesn't look like regulators won't deal to get done.
With that said, we are citizens of the customer of ours and they acquired Silicon Valley Bank in the quarter. So obviously, a great opportunity for us and we look forward to working with first citizens and Silicon Valley Bank on do whenever we can't integrate those and make that conversion as simple as possible.
But but M&A is.
Obviously slowed down but I think the reason we had been so successful in M&A those reasons still exist and when it picks back up when consolidation happens we're going to be in a good spot again in my opinion. So it's just a matter of kind of like I said earlier, just weathering the storm and we still have the most strategic customer base.
I would argue of the vendor out there in those customers are going to go acquire other financial institutions to grow and get scale in this economy.
Understood. Thanks again for taking my question. Thanks, Barbara next Burger.
We'll take our next question from Alex My grasp away the Keybanc capital markets.
Hey, all thanks for taking the question, maybe just to pile on to the demand topic more specifically within the kind of emerging business.
Conversations more broadly have evolved with with customers in the last couple of months and maybe how expectations for 2023 have changed if at all is the backdrop has has evolved a bit. Thanks, yeah. So let's bifurcate between innovation studio in helix on innovation studio side, we are seeing more demand for partners for access to the channel. So they want.
Aren't they want to integrate with banks and credit unions and as they faced headwinds in their business because of economic pressures funding pressures the demand for a single point of entry too. Many users like we have over $21 million on the platform. We're seeing broad based demand for our partners. That's driving a lot of the success. We are seeing on the innovation studio side.
When you look at helix side, I think you have seen some impact on the net new environments in terms of the lengthening of sales cycles because of <unk>.
[noise] scrutiny around banks, especially post March 9th and all of our in our model or <unk> and brands are partnering with sponsor banks and so there's definitely a different level of diligence that goes into that but the pipeline is still strong I think if anything the demand for deposits is driving a renewed interest in what a lightweight core can do.
To help drive deposit gathering strategies. So we feel really good about it and as we talked about on the call. Our existing customers are renewing with us, we're being very strategic and helping them navigate their profitability profiles managing things like fraud.
But it's a matter of again navigating this environment and making sure that we're there for our customers in the right position to win new deals as they come out but the pipeline does remain strong for the rest of the year. So we're we're cautiously optimistic.
Great. Thank you.
Thank you thanks, Alex Alex.
Thank you and this does conclude the question and answer session. Thank you for participating in today's call and you may now disconnect.
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