Q2 2023 Q2 Holdings Inc Earnings Call
Good afternoon.
Frank I will be your conference operator today.
At this time I would like to walk I might <unk>.
Q2 Holdings second quarter, 20th 23 financial cells Conference call.
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After the speaker's remarks, there will be a question and answer session.
If you would like to ask a question at that time simply press star.
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Thank you.
I would now like to turn the call over to Josh Yankovich.
And faster relations Sir. Please go ahead take your operator, good afternoon, everyone and thank you for joining us for our second quarter of 2023 conference call with me on the call today, our <unk>, our CEO David R. CFO , Jonathan Pryce, our executive Vice President of strategy in emerging businesses and Kirk Coleman our president.
And as for the Q&A portion of our 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. 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 copies of which made it out on the Investor Relations section of our web site, including our quarterly report on Form 10-Q filed today in subsequent filings in 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 investors should not assume that these statements will remain operative at a later time and we undertake no obligation to update any search forward looking statements discussed in this call.
So 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 in a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which may be found any investor relations section of our web site and in our form 8-K filed with the SEC. This afternoon.
We have also published additional materials related to today's results on our industrial relations website and finally before we begin we'd like to remind everyone that our annual ESG report was released last month and is also accessible on our website. Let me now turn the call over to that.
Thanks, Josh All star today's call by sharing our second quarter results and highlights from across the business will then hand, it over to Jonathan to provide more insights into the emerging businesses organisation. He oversees David will then discuss our financial results and guidance in more detail.
Since August of last year with a laser focused on managing our business towards profitable growth and our financial results demonstrate that we're executing on that strategy.
In the second quarter, we generated non-GAAP revenue of $154 $6 million up 10% year over year. We saw continued to strengthen subscription revenue, which was up 15% year over year.
And we had another quarter of strong profitability result, as well with adjusted EBITDA $17.6 million or 11% of revenues.
We are especially pleased with our ability to prudently manage costs in recent quarters, which is reflected in our approximately 450 basis points expansion and adjusted EBITDA margin over the past year.
We had another solid bookings performance in the second quarter, resulting in the best first half of bookings in company history.
Year to date with continued to see a few specific trends in our sales performance regarding the types of deals were winning their magnitude and their impact to the business.
First our average sales price has seen a meaningful increase as our dealers have become more comprehensive and we continue to move up market.
<unk> has grown by approximately 30% over the past year.
This expansion has been driven largely by our commercial solutions, which were front and center and the majority of our net new deals in the first half of the year.
We also continue to see a broader adoption products from across our portfolio.
As a result of the expansion NASP many of our tier two deals from the first half had an initial bookings impact similar to our historical tier one deals.
For example, our largest deal from the second quarter was with the 3 billion dollar credit.
The second trend that highlight is that we're competing extremely well has demonstrated by win rate of over 50% for the first half of the year.
Or when right span a broad mix of both the retail and commercial deals reinforcing why we believe we are uniquely positioned in the digital banking landscape.
Q2 animation studio has become a significant differentiators in virtually every digital banking opportunity. It continued to be cited as a key driver in the majority of our digital banking wins from the first half and was included in every single digital banking wind in the second quarter with a retail or commercial.
On the commercial side more specifically, we're winning and moving up market with a comprehensive feature said, it's wrapped in a modern mobile enabled user experience.
In the second quarter. This approach to commercial earned his recognition as the best in class leader in the 2023 cash management technology providers, the vendor assessment by <unk>.
We're proud to be recognized by such a prominent source in the industry and believed this recognition validate our leadership position and commercial digital banking and we will continue to contribute to our momentum in the market. When we started this company. Our first line of code included business functionality and over the last decade, we've made substantial investments and broadening our commercial.
And to support larger more complex businesses.
It's hard time intensive work building the unique integrations and conversion experience required to operate in wind in the commercial space and I'm proud to see a paying off for Q2 and more importantly for our commercial customers as they navigate the heightened pressure to acquire and retain deposits.
So despite some of the disruptions in our end market in the first half of the year. We're encouraged by the strength of the demand environment the rate at which were winning deals and the continued adoption of a broad set of our solutions and even with our ongoing booking strength of the last several quarters. We believe our pipeline remains strong a great signal for the demand environment in our.
Opportunity in the second half of the year.
Focusing in on the second quarter, specifically, we landed a solid mix of deals, including two tier one digital banking wins, one net new relationship pricing deal with a tier one institutions and an expansion with a top 100 U S Bank also using our relationship pricing solutions.
Expansion is particularly noteworthy because it came from our existing relationship with a financial institution that was recently acquired by a large bank holding company.
This deal extends our initial agreement and over time can lead to additional opportunities to increase adoption across the holding company.
Both the net new an expansion deals where competitive scenarios, where our relationship pricing tools were selected as the solutions of choice by the customer.
And the loan in a relationship pricing activity from the quarter gives us momentum entering the back half of the year.
Another major highlight from the quarter with our annual client confidence connect which we hosted in person for the first time since the pandemic began we.
We saw record attendance at the event with more than 1000 attendees from customers prospects in partners.
The overall customer sentiment connect was extremely positive and there were a few key themes from our conversations I'd like to highlight.
First attract.
Attracting retaining and growing deposits was top of mind for customers. This year, given what's happened in the banking industry.
Clear they believe digital banking is critical to their deposit strategies and we have a broad set of solutions designed to help them succeed across the retail and commercial aspects of their business.
There was a lot of buzz about AI it connect including large language models of machine learning coming out of the conference. We believe our customer share our excitement for the potential of these capabilities and the debut S. As a trusted partner in this space.
With almost 22 million end users.
$5.1 billion annual logins and over a trillion dollars in loans supported by our solutions. We have one of the most comprehensive data sets in financial services.
We've been using the data to power artificial intelligence and machine learning solutions for almost 15 years.
<unk>, we offer data driven products that help our customers prevent fraud.
Target and cross sell to their account holders and Personalised the digital banking experience because of this we are deep domain expertise and AI and we've established the framework, that's enabling our internal teams to utilize new AI.
We're prepared for things to evolve quickly in this area and we're excited to leverage our leadership position to expand our use of AI those for our customers and to drive efficiencies within the business. The final thing might highlight from connect with the energy around Q2 innovation studio, which drove a lot of engagement at the event, thanks to our partner ecosystem model.
We had over 150 partner attendees that connect and many customers shared stories on stage about some of the outcomes, they're driving with Q2 innovations studio such as launching new solutions in just a few weeks achieving more than a million dollars and combined fees and cost savings and reducing call volumes by over 70% with a virtual chatbot just to name a few.
Based on the birds around Q2 innovation studio, it's easy to see what's playing a key role in our high when rates the last several quarters and we're excited to see more financial institution to Fintech partnerships coming out of the event.
In conclusion connect twenty-three was our biggest and best conference yet and our customers commitment to digital was on full display their.
They are highly engaged excited about our roadmap and they want to do more of the digital channel. This energy has contributed to the momentum we believe we're bringing into the back half of the year across our business.
With the existing customers Keith prospects and Fintech partners with that let me turn the call over to Jonathan to cover a few key highlights from our emerging businesses.
Thanks, Matt I'm pleased with the Royal queue to innovation studio continues to play in the success of our business.
Since last year, the number of Fintech solutions deployed by our customers as well as the number of end users utilizing them has more than doubled.
Through this flywheel effect, we're executing on our vision for Q2 innovations studio and we're confident it will continue to differentiate us in the market.
In fact Q2 innovation studio was cited as a key reason for selecting Q2 and 100% of our net new digital banking deals from the second quarter.
While we previously reported that it has contributed to the majority of our deals in past quarters. This is the first time, it's been a key driver and every single one.
Q to innovation studio, even played a role in one of our wins on the helix side in the quarter, which I'll move over to now.
He likes soft solid activity in the second quarter highlighted by a significant win with a market leading insurance provider and the addition of a tier one institution five-star back at the bank of record.
Our initial relationship with five star began on the digital banking side.
After their positive experience with Q2, and the innovation studio the bank determined they could expand their deposit strategy through partnering with UX.
As a bank of record five star will provide the depository infrastructure for brands and Fintechs. They use the helix platform to offer checking and savings accounts to their customers a key component of our helix offering.
As deposit growth and retention remain top priorities for our customers bank of record partnerships. Like this are unique way for financial institutions to generate additional deposits outside of their existing customer base.
During the quarter. We also landed a net new deal with one of the largest insurance providers in the nation.
With this deal he likes will help the company rollout are unique deposit account offering which will embed our solution across multiple insurance products within the company, helping them drive deeper engagement across their products and greater value for their customers and.
In a highly competitive selection process. The company ultimately chose UX, because we offer a cloud based real time core that gives them the personalization flexibility and granular control to design and manager unique product for each of their users needs.
And because of our proven ability to support major clients like this at scale.
Thank you and with that I'll hand, the call over to David to discuss our financials.
Thanks, Jonathan.
Our second quarter results continue to demonstrate the demand environment remains favourable and we're focused on executing on driving growth with enhanced profitability for.
For the quarter non-GAAP revenue came in near the top end of our guidance range and adjusted EBITDA exceeded the high end of our guidance.
As Matt mentioned, we've increased our adjusted EBITDA margins by approximately 450 basis points over the past four quarters, and we continue to see strength in bookings associated with our higher margins subscription business, which is reflected in our IRR.
With that I'll begin by reviewing our results and conclude with updated guidance for the third quarter and full year 2023.
Total non-GAAP revenue for the second quarter was $154.6 million, an increase of 10% year over year and 1% sequentially. The.
The year over year increase was driven by growth in subscription based revenue, which was up 15%.
The year over year subscription revenue growth was driven by a mix of the deployment of net new digital banking and loan relationship pricing customers.
As well as crossover products.
In addition, we've seen continued strong growth from our risk and fraud solutions.
Our subscription revenue for the quarter was 75% of total revenue align with the previous quarter and up from a 72% of total revenue in the prior year.
The continued strength in subscription revenue reflects the start of solve the go lives associated with the strong bookings from our core solutions. We saw in the second half of last year.
Transactional revenue represented 11% of total revenue for the quarter down from the prior year period of 13% and consistent with the previous quarter.
The year over year decline in transactional revenue as a result of the trends we started to observe last year, including continued secular slowing a bill pay as well as reduced growth and helix space transactional revenue.
During the quarter, we added more than 200000 users to our digital banking platform and in the quarter with approximately 21.7 million registered users an increase of 8% year over year.
The year over year, and sequential increase was largely driven by organic user growth.
Annualized recurring revenue or.
<unk> grew to $681.2 million up 11% year over year.
Our subscription growth for the quarter was 16% year over year, driven largely by net new deals within our digital banking business and continued expansion with existing customers.
We expect subscription growth will be at a premium to totally our growth for the remainder of the year.
We ended the quarter with total backlog of over $1.5 billion. This represents year over year growth of 12%.
And is down marginally compared to last quarter by $1 million.
A year over year increase was attributable to strength and net new bookings, particularly within digital banking over the past 12 months.
As we mentioned previously the sequential changing backlog may fluctuate quarter to quarter based on the number of renewal opportunities available within a given quarter.
However, we continue to believe we will show an increase in backlog for the full year.
Gross margins, where 54.2% for the quarter.
Up from 51.3% in the prior year period, and 54% in the previous quarter.
The year over year improvement in gross margin was driven primarily by a favorable mixon revenue towards our higher margins subscription based business. In addition to cost efficiencies, we began driving in the second half of 2022.
The slight sequential increase in gross margin benefited from a lower mixer pass through revenue from our helix business and reduced expenses associated with payroll taxes. Following R Q1 annual equity vesting and bonus payout.
Total operating expenses for the second quarter, where $72.9 million.
For 47.1% of revenue compared to $67.4 million.
Or 48% of revenue in the second quarter of 2022.
And $72.5 million or 47.4% of revenue in the first quarter of 2023.
The year over year in sequential decrease in operating expenses as a percent of revenue were driven primarily from improved cost scaling to revenue within sales and marketing and research and development through the effective utilization of our global workforce and enhanced productivity, which more than offsets the increase in G&A expenses.
Which were predominantly related to third party fees.
As a reminder, we mentioned that our annual client conference would incur additional costs in the second quarter, and therefore expect to see improvement in sales and marketing cost scaling to revenue in the second half of the year.
Total adjusted EBITDA was $17.6 million for the second quarter accompany record and up from nine $7 million in the prior year period and $16.5 million in the previous quarter.
The roughly 450 basis points of improvement and adjusted EBITDA margin from a year ago benefited from the mixed towards higher margins subscription revenue more.
More effective utilization of our global workforce and broad based efficiencies across the organization.
The sequential changing adjusted EBITDA benefited from lower than anticipated bad debt.
As well as cost efficiencies associated with developing delivering and supporting our solutions.
We ended the second quarter with cash cash equivalents in investments of $280 million.
Up from $271.7 million at the end of the first quarter.
We generated positive cash from operations of a $13.1 million as a.
<unk> of our continued emphasis on profitability and strong working capital management.
We also generated free cash flow of $3.7 million in the quarter, resulting in positive free cash flow for the first half of the year.
Typically our first half as a more challenge period for our cash flow generation based on seasonal drivers, but for the first time in company history, we delivered positive free cash flow for the first six months of the year.
Let me wrap up by sharing our third quarter and updated full year guidance.
We forecast third quarter non-GAAP revenue in the range of $153.5 million to $156.5 million.
In full year non-GAAP revenue in the range of $620 million to $628 million.
Representing year over year growth of 9% to 11%.
We forecast third quarter, adjusted EBITDA of $17 million to $19 million.
And we're raising our full year 2023, adjusted EBITDA to a range of $71 million to $75 million, representing approximately 11% to 12% of non-GAAP revenue for the year in summary for the second quarter. We delivered revenue results of the top end of our guide with adjusted EBITDA <unk>.
Above our expectations, we continue to see our total revenue growth driven by our higher margins subscription based business.
This combined with our continued focus on driving cost efficiencies gives us confidence in raising our adjusted EBITDA outlook for the remainder of the year as well as our ability to meet our rule of 30 target at some point in the back half of 2024.
With that I'll turn the call back over to Matt for his closing remarks.
Thanks, David Inclosing I'm extremely pleased with our performance in the first half of the year in the direction of our business moving forward.
Our broad mix of deals and consistently high wind rates demonstrate both the continued demand for our solutions and are competitive positioning in the market.
Looking ahead, we expect to focus on deposits to maintain a favorable demand environment for our solutions.
And when you consider our sales execution in recent quarters. The continued recognition from industry analysts like <unk> and the Tailwinds, we anticipate from our annual client confidence. We believe we enter the second half of the year with a lot of positive momentum. We remained laser focused on converting our pipeline and executing against our profitable growth strategy to continue driving.
Value for employees.
Customers and shareholders.
And I'll hand, it over to the operator for questions.
At this time I would like to remind everyone.
In order to ask a question.
Star followed button number one on your telephone keypad. Your first question comes from.
Matthew Sweet with B T I G.
More line is open.
Yeah. Good afternoon. Thanks for taking my question wanted to could not have been a little bit on.
Not only the bookings strength, but the the backlog commentary and just sort of how the progression of rollouts are going the appetite for customers to go live as quickly as possible and and how various parts of the innovation studio or helping sort of speed the process along to get cut.
<unk> revenue.
Hey, Matt as.
As we've talked about we've had great strength and bookings over the last few quarters now a lot of those deals were larger in nature.
You have larger deals and more complex deals you tend to heavy long dated time to revenue, we're certainly expecting that and you know in regards to innovation studio specifically.
The team there has gotten very efficient so that does not become an obstacle in terms of delivering on.
The implementation dates that we've agreed on with our customers. So do you think about implementation studio. It's obviously, an incremental aspect of the digital banking solution, but it does not elongated what he longed to deals or the or the overarching complexity and size of the digital banking opportunity.
They're very helpful and then.
Jonathan on on the the helix deal in the quarter and maybe looking sort of all of the the additional features are adding and you mentioned you know every deal in this quarter even on the digital banking side included innovation studio so.
Obviously kind of a broad question here, but.
What are you doing for the non traditional institutions that are seeing an increasing rate of adoption and then maybe just touch on you know how much of that has been sort of brought over from the digital banking side and enabling some of those capabilities.
So to start on a digital banking side with innovation studio Yeah. There were seeing a lot of adoption at scale I think if we have this conversation six months ago, a year ago, we would have been talking about one or two apps on a small segment of <unk> and now we're starting to see multiple apps go live across numerous <unk> and so what I would say is just as this.
Continues to get further and further into this flywheel of adoption. We're just looking for more opportunities to get these products into the hands of their end users faster and really importantly, helping them market. These solutions to their end users because there's only so much value in putting more products in the hands of the archives, if they're not actually.
Getting utilization and adoption by their customers and so that's really where the focus is on it and how do we how do we help them extract the value of her getting from this.
Incremental innovation that we're putting in their hands and then translating over to the helix side. We are seeing a lot of cross-pollination between innovation studio and he likes when it comes to.
Talking to banks that want to participate in the bank of record program talking to larger Phanteks, who want to think about launching an embedded finance program.
The big when we had in the quarter into some of the momentum in the pipeline going forward. The common theme is there is more focus around deposits sort of similar to mass commentary around digital banking on the focus on deposits that's true across financial services and so that's really driving the strategy is certainly driving the strategy of the big when we talked about in the corner. So.
Lots of good things happening, but we're just trying to facilitate getting more of these deals in the door and getting these these products on the adoption flywheel rolling as fast as we can.
Alright, great. Thank you.
Thanks, Matt.
Your next question comes from the line of Adam.
With Goldman Sachs.
[noise] line is open.
Great. Thanks for taking my questions, Matt could you just stick a little deeper on on how the demand environment of all being particularly as it relates to the larger Asp's you talked about when you think about how things are going now and what's driving customers to land broader when you guys. How sustainable do you think that is over a multiyear period and how much of that is.
Just sort of reminiscent of the current demand environment.
Yes.
We've talked about that right now to go to have a strong fourth quarters, we did that a first and a second it's.
As you will get that many in a row I think we had three tier ones Victor was in the first quarter.
Two on the digital banking side, and then a tier one on on the relationship pricing side of the business with.
With the deposit.
The.
The thirst for deposits right now and then the pressure that they're feeling from the deposits that move to other financial institutions, the larger financial institutions around a digital banking experience it commensurate with the big four.
We're in a really unique position with the breath of our products.
The experience and delivering them and supporting them and the integrations that we have and so.
As long as you have this demand around deposits that we have right now and you have we're really uniquely positioned in the billion to 250 billion Bank credit Union space.
I think I think this is going to continue for the foreseeable future I don't see any any relief on the on the deposit side of the business. So I think this is something that is going to continue for awhile. The pipeline demonstrates that it's up still after the.
Last three strong quarters with that and I anticipate closing those deals and having a strong finished of the year.
Great. That's really helpful. And then just a double click on queue to innovation studio when you take a step back how big of an opportunity do you think that can be for you guys. You know I can imagine a world where you.
You look across the platform and there are dozens more partners and developers working with you guys on different pieces of functionality. When you look at both with the depth of the products could look like and the breadth of the product from a from an offering perspective.
How much do you think that adds from a penetration perspective on your on the sort of perspective pipeline and the space versus where you are today, just would love a higher level higher level commentary on where you think that can go.
It's also what you take that you've built that business.
Let's start by just saying when when we think about the universe of products that we're adding these partners that are coming in building to our API and embedding within digital banking, we very much <unk> as an extension of our own R&D paradigm, our own innovation that we are widening the aperture of what we can deliver to our customers and to their end users and so.
When you think about R&D scaling when you think about long term.
From a P&L perspective, what that brings from a margin perspective, there's a lot of value better, but when you're sort of talking about what it could do from a penetration perspective to our customers I mean, we've seen at quarter over quarter for the last several in terms of the way it's impacting our net new wins as I talked about on this call 100% of the met New digital banking wins cited innovation studio is a key.
Reason for selecting US and then you think about how.
How the overall economics will flow over time, as we want more and more of these partners.
Embedded within the banks the banks are participating in economic fire interchange by Rev share on subscription revenue and as importantly, there saving a tremendous amount of costs. When it comes to one time integration fees and ongoing partner fees that they would have minimums around if they were if they were going direct and another model.
So all of those lead to more engagement with our customers better retention stickiness with these customers over the long run and ultimately an economic model that can be attractive for everyone involved. So we really think this is a very strategic piece of the business and the economic value that can come from revenue in the margin.
Profile associated with that revenue because it's on that and it comes at high margins. We think is very intriguing over the long run a monica how can help the business. So hopefully that helps address the question.
Really helpful. Thanks, everyone.
That makes sense.
Your next question comes from Teri Colman with Truth Securities. Your line is open.
Yeah, Good afternoon, Matt, David Jonathan and Josh I think I've got everybody there <unk>.
<unk> job on the the results from first question for me is where we're not hearing much about large increases in asp's deal sizes. So it's impressive about the 30 per cent growth. There I'm curious actually has some of the surround the product and packaging that you often evolving over the last year and a half with Q2 catalyst how much of a catalyst no pun intended is that with some of the big.
That's P growth and then how to follow up question.
Yeah, I mean, clearly the demand for pricing relationships Onboarding fulfilling and then actually running the operating account is at the center of what's happening in our timing on it couldn't have been better kirk's in the room with me here. He was he spearheaded a lot of that but I think a lot of that has to do with the catalyst product but.
I think I said in the scripted every deal had retail and a as well so we're waiting on retail running a small business we're waiting on commercial.
Positional ended the relationship pricing tool is actually.
Actually pulled a couple of deals in ahead of what.
I thought they were so stacking up very nicely built on not just the cute catalysts solution that we have but all of the features and the products that we put so much time and energy in.
Over the last 19 years, but in particular over the last four or five on the commercial banking side of things and the catalyst product are really differentiated in the marketplace and that shows up in when rates Nasp's.
Got it thanks for that and I guess, you know in terms of some puts and takes that are gonna continue as we move into 24 I'm. Just curious if there's anything you all can share kind of growth algorithm wise in terms of you know you've got this ongoing probably week discretionary services transactional revenue.
And then at some point, maybe up or be dynamics offset by the string of strong bookings I mean anything at all you can share about as you look further out and how to think about some of those puts it takes thank you.
Hey, how are you covered a lot of those variables there and the question itself.
Certainly it's too early to get into any specific Gaelic on 24, but.
Based on what we know today, we would expect the pressures that we're seeing in transactional services to continuing to 24 and I would also make sure that as you're thinking about 24, you're factoring in that impact of FRB migrating off of our platform and.
At some point during the year on a subscription so I know Matt asked a question.
Around delivery times and as I said in answering that question, we've had strong bookings for sure but there have been large deals and so we've got to make sure that we're factoring that in as we're looking at the go lives of those deals over the course of the next six to 18 months and then very importantly, we have to understand how the back half of twenty-three books.
He plays up both in terms of the shape of them in terms of the mix of crossroads of Jeanette, new as well as the overarching size and we talked about this consistently and we're going to continue to talk about it we're continuing to aggressively execute on all the efficiencies and the cost profile of the business and we certainly expect that the path to the rule of <unk>.
30 at some point at the end of 2024 that we've mentioned is going to be vastly weighted towards EBITDA expansion.
Understood. Thank you.
Thanks, Gary.
Your next question is from some line of.
<unk> <unk> with bird your line is open.
Great how everyone, maybe just picking up on that last question. So I wanted to ask about hype.
Pipeline and how do you think about risk adjusting pipeline just given obviously digital banking is invoked again, you're talking about big opportunities, but the big opportunities.
Oh, so I'd come with timing and sales cycles that can be a bit trickier and then related to the last question just on sales cycles. Obviously anything book now doesn't really impact this year, but I might that kind of risk adjusting of pipeline factor into kind of the the back half of next year in that room.
30 framework you're discussing.
Yeah, so as far as risk adjusted the pipeline.
Obviously been doing this a long time and so we're able to look at the deals were engaged in the conversations both at an executive level and at the at the Red level.
We do a pretty good job of factory and when the decisions are going to be done.
At the end of a quarter. It always comes down to can you get get it done.
By the end of the month, and we don't really live off of cutting deals at the end of the quarter, because we don't book any revenue on it so.
The.
With the clothes rates that with our when rates that we've had as well as the pipe as I look at it as it continues to grow and I look at new deals they are larger.
Both NASP and then the size of the financial institution.
Feel really good about where we are for the.
For the for the pipe is our ability to execute on our plan for the back half of this year.
[noise] relationship pricing Precisionlender those deals tend to skew larger so.
It does take a little longer when you're dealing with top 100 institutions, but I'd also point out that those those opportunities have a tremendous amount of expansion opportunity you get in and you might be on one line of business and then you could expand on that line into other lines of businesses as well as other geographies, we have seen that happened on the precision Linda.
Product and I think you're going to see that happen unfold for us in 2420 foot and David can talk about how.
They are and they are going to flow through I think he he talked a little bit about.
How they're gonna have to we have to.
Look at what the products or it will be delivered with the timing of the financial institution does that matters as well when can they apply.
Apply the resources to deliver it but I would tell you that it sets up the last three quarters in the back half of this year sets up for for a really nice back half of 24 for sure and a really strong twenty-five as we start getting into this and that's just the time it takes to deliver these products in this space but.
The durability and the.
Outlook for us when we start to have strong quarters like this.
Ripples through for a long time, David anything you Wanna add no I think you hit it Matt.
Okay, and then I didn't Wanna, let David off the hook. So maybe one question for him yes.
Yes.
The the booking strength do you do you think some of the trends in <unk> you know looking at maybe the next 24 month contribution or or even the.
The longest term segmentation of art P. O is that kind of the the best place to look to foot to the bookings strength. Because then I wanted to relate it to maybe the the calculated billings in the corridor decelerating and just getting your take on kind of the the best set of numbers to look.
Yeah, Joe I would say a couple of things one in regards to <unk>. The one thing that we understand that it's leading indicator that you look at it and if you look at it over a long period of time, it's going to give you an idea of the type of revenue opportunities that we have on the horizon. If you look at a quarter to quarter you can be head fake very easily by the <unk>.
Amount of rules that are in scope, so and I know, we've been emphasizing that but it's really important to do that because you saw in Q4 of last year, we did 43% of our renewals in Q4 of last year. So as a result, a huge spike in our backlog at the end of the queue for.
We expect that this year, it's going to be back end loaded in terms of renewals as well that seasonally what we typically typically have.
The one thing that I would tell you to look at more so is.
And what that's telling you in terms of not only.
Now, it's building, which is really important the subscription growth rate within that which we discloses 16% year over year. So you're seeing strong growth on the subscription side and then what other data point that May help you in regards to your question specifically as theirs, 12% of that that's not live yet and that's the highest level. We've seen in a couple of years. So that also gives.
You an idea of sort of what's out there.
The horizon to be booked to be turned into revenue over the course of the next 12 to 24 months.
That's great thanks very much.
Your next question comes from the line of Park Ridge Lane with Stifel.
Mine is open.
Hi, This is Matthew kicker on for Parker. Thanks for taking my questions to start I'm curious what your thoughts are on the health of regional banks and credit unions right now coming off of the Q1 banking crisis and how is that impacting layers of your revenue guidance for the remainder of the year.
Particularly around discretionary services fund.
Yes.
Turkey.
I've been to the health of the banks and the credit unions and.
Take the guidance one yeah sure so the.
The reasons for that people need banks and credit unions are sounded fine in the mini crisis, we had at the end.
Of the first quarter doesn't change that and so.
Terms of the services that they're providing and we tend to I think people tend to paint banks and credit unions is just kind of one thing and it's very often the last thing they read in the paper, but the truth is is that there is a great wealth of diversity amongst the communities that they serve in the institutions themselves.
So we see a lot of strength and that we see a lot of really strong strategic thinking and operational focus amongst our customer base and the prospects were talking to.
Although they're really focused on deposit pricing.
Retaining all the operating accounts of their customers high on credit.
A focused on their highest priorities.
Because I've got a seat all the way through would ever Rocky period, we're in and we think digital remains one of those top priorities and the other.
I would add that I was talking with one of our customers at a there'll be 10 billion dollar financial institution and he was telling me that.
He's beginning to hear some customers that moves just move deposits to some of the larger banks and they're already frustrated with communication responsiveness follow up follow through pricing.
When you're running a business small or big.
You need a banking relationship and you have to be available and you have to understand the challenges whether it's in the community or whether it's the industry, they're in and that's one of the things that a lot of our customers banks and credit unions, both bring with its retail where commercial it's just that understanding and that ability for them to access those people and solve problems with him. So I think.
Think that's probably going to be a trend that continues once the dust from March 10th settled down a little bit.
You can feel it on the guidance, but probably just say that it's folded in but.
It is that's the short answer is folded in Matthew and May when we took down our revenue guidance was predominantly related to the discretionary spending component that we've been talking about and that was part of your question we.
We do have more certainty now than we did three months ago, and it's probably not surprising and as a result, we've tightened the range by 2 million in the bottom 2 million at the top of the same midpoint.
So how we viewed that discretionary spending back in may.
Is still relatively aligned with how reviewing it today, it's just the high and the low end of tightened a bit.
Okay, that's good to hear and really interesting on the relationship side and.
And then secondly, you start to generate additional free cash flow as part of your margin expansion strategy could you talk a bit about your capital allocation plans over let's say the next two to three years.
Sure we're constantly looking at optimizing our capital allocation, there's obviously different different levers and opportunities that we have.
We pulled one of those levers in March in terms of buying back.
Some of the convertible debt there was outstanding at a discount we looked at generated a nice return for us.
We're constantly perusing the landscape to understand if there's opportunities out there and I'll, let Jonathan sort of talk about.
The M&A environment writ large.
And then obviously, we're deploying our cash internally to the investments internally that we think are and it generates the best and biggest return and we're being much more focused over the course of the last nine to 12 months Matt.
<unk> talked about some of the things that we began doing in August of last year. Both in terms of our cost structure in terms of our capital allocation and making sure that we're our investments are going into where we're going to generate the biggest return in the areas that aren't.
Deinvesting and we think that that's going to provide the most value to our customers as well as to our shareholders, Jonathan I want somebody in that environment.
I would just say we are constantly evaluating the M&A landscape, we think over the long run you mentioned two years, because we got out two plus years out we think there's going to be lots of opportunity for consolidation across the front tech landscape, but what I would say, it's sort of sitting here now and looking at the pipeline is between the converged David mentioned in the overall financing environment. We're in there is a lot.
Scarcely value to our cash balance that we have and so we're going to be very disciplined and and have a pretty prudent approach for thinking about allocating capital towards M&A, and making sure that both value and quality of asthma have come in line and in our view what we've seen is especially in the private M&A markets. Those two things haven't come in line yet.
But we would expect that to happen here over the coming.
18 months, so I'm always watching it but ah.
Cautiously waiting for that opportunity.
Terrific. Thank you very much thanks. Thank you.
Your next question is from the line of Alex to learn with Raymond James Your line is open.
Great. Thank you matter of David I know third quarter isn't isn't historically, a big bookings quarter for you all seasonally but given to me earlier comments on pipeline and and then the earlier deal closing you referenced Precisionlender. What are you underwriting for the rest of the year in terms of kind of sales cycles and demand backdrop.
For subscription bookings relative to what you saw in the first half of the year.
Yeah, we don't.
We don't give very specific guidance on subscription relative to transactional services, but we will say is that we absolutely believe that subscription is going to be growing at a significant premium to both of those other two revenue both of those other revenue streams.
We think that is going to continue Q3, and obviously in the queue for as well and in fact, if you look at Q3, specifically from a sequential standpoint.
The guide contemplates.
Likely be a reduction in the combination of transactional services offset by sequential growth in subscription. So that will help give you a jumping off point into the queue for where again, we expect to see strong growth in subscription relative to continued subdued.
Services and transactional.
Okay, great color on that and then just as follow up matter Kirk I did want to ask you about some of your more data oriented solutions. So great Precisionlender success this quarter and I know you too smart as well I'll I'll lumping that bucket, but can you just elaborate a little bit more and what's driving me up there can demand for those your date and the current backdrop.
Thanks.
Yeah sure. Thanks for the question.
I think particularly in both cases really but I think is particularly applies to the relationship pricing aspect for precisionlender.
We have a business environment a lot of bankers just don't have a lot of practicing this sort of thing about the rank and file of commercial things and so the breath of data that we have and we're able to put the work for them.
We're able to provide them with really kind of database coaching tools that they can use every day in terms of.
Working with their customers.
And that allows them to focus on the thing that makes them special right. The relationship they have with those individuals running those businesses.
We think is really important part of life by this we're seeing some strength there an interest in that.
And even if rates go down at some point that environment is not gonna change I think we're just in a different space here for quite a while.
In terms of what the competitive environment is and so they will continue to need.
To put to work as much data as they can but in the end it really comes down to kind of that banker that that person at the at the face of the customer putting that data to work everyday and that's where I put a lot of our solutions are focused on yeah. I would just add that all of those things and then in addition to that the analytic.
And the data that we use on our fraud analytics tools for payments.
Payments and identifying who who in the system and that they're actually doing what they're supposed to be doing is is really paying off we stopped a lot of fraud with the demand on these systems. It's through the roof. I think I said 5 billion logins in the last 12 months on the application not always a good people. So we are using that data to stop fraud and it's almost.
<unk> to every single deal an existing customers that don't have it or are in line to get it. So it's a big cross-sell item for us and it's attached to most of the net new deals as well so.
As I said in the script, we are but we have a team that's work with data for a long time and we have data that week.
<unk> and we we take very seriously and we want to make sure that we're using it in the best way possible for our customers, whether it's to understand their customers better cross sell products or stop fraud.
So really excited about that opportunity for us.
That's that's a great color I I did see the the new security insights announcements and and no. Those are those are quarter. The Q3 panelists package. So thanks for the absolute thanks, Alex Alex.
Your next question comes from the line of Bob Napoli with William Blair. Your line is open.
Good afternoon, everyone sat around for Bob So one question bigger picture on the helix.
Could you kind of.
<unk> finance opportunity more broadly for a heel like and if you're seeing an acceleration just in terms of brands are <unk>. Obviously, you guys have diversified with the insurer insurance Lynn, but just kind of got a demand for financial products from non-financial institutions, and then maybe a bit on the competitive landscape there as well. Thank you.
Yeah sure so.
This is something that has evolved from let's say a year ago, where the aperture of industries that was looking to get into embedded finance was very very broad basically any vertical of the economy in any branch that had a large user base with a ton of loyalty to their brand was contemplating entering financial services as the last year has pointed out with the.
<unk> and with folks cross every industry really focusing on their core business. We've seen the universe of areas, where this makes sense, where they are willing to act and enter embedded finance.
And launching embedded finance strategy narrow and so that's why you've seen a lot of our wins recently common and verticals that I would call adjacent to traditional financial services areas like insurance and wealth in particular areas of focus for us and we're we've had success and so we still see a lot of opportunity embedded finance, we still think brands and <unk>.
Over the long run will will value and enter this space and launch programs, but the last year has certainly been a.
A smaller universe of folks that are willing to go and undertake this this strategy.
If it's not really core to their primary business. So hopefully that gives you a bit of color as far as the competitive landscape. We really haven't seen much shift what I will say is a lot of the provider's that popped up as fintech was being well funded over the last five six years.
Our middleware providers as opposed to an actual core like we are and there's differences in that's popped up in terms of the regulatory framework unworthy OCC has been focused in terms of how you can.
How how your controls and procedures work.
Relative to a traditional bank and expectations being the same from the regulators, even though it's it's <unk> in a in a middleware provider on a bass bank and so.
Whether it's the regulatory environment, whether it's actually being the source of truth in the corps, we have some real competitive differentiation versus those folks and then there's there's been some of the larger players that are well known in this space being a green dots or a galileo that that continue to play in the space and are adjusting and have done acquisitions in their businesses have changed.
Over time, so it's an evolving space and we think we are in a unique position in terms of the our product with what the helix product is in terms of our go to market strategy and we're just trying to focus on where we are well positioned where we think we have the right to win and we're executing a at a high level on that and so that's been the focus.
Great that's all I have.
Hey, guys.
Your next question is from the line of Andrew Schmidt with to the global markets.
Mine is open.
Hey, guys. Thanks for taking my questions and crests on the state your results here.
I wanted to dig into the the wind right a little bit and apologize hopped on late point. You said. This has been asked but you know continues to be elevated very positive.
What do you feel like it's driving and obviously you know there's.
Self driven function in terms of your product said I think commercial capabilities part of it but is there also a competitive or market dynamic as well that's supporting the elevated when right would love to just dive into the what what's supporting that elevated when right. Thanks, a lot guys.
Thanks, Andrew.
Will tell you it's a couple of things.
The work that the 2300 people this company do everyday to provide a great customer experience.
A lot of software for us they wake up they get up early in the middle of the night when they go to solve problems will do that.
And we had.
No that I've had customers as happy as they were at this last conference that we had and pleased with our delivery touches of our products, but the service associated around it.
Obviously, the the next thing will be the products are highly differentiated in the marketplace and I don't know why but for some reason other providers in the space of struggling with that I don't I don't want to use any names, but there's there's a collection of larger companies that are out there that are are a lot of different things going on and focus that may not be audit.
<unk> banking applications and all the stuff I just talked about that matters earlier.
And then when you get into an environment, where where you are where you are right now where there is just a feeling of a regulatory push coming down on financial institutions smaller companies that are profitable that are.
Publicly traded and don't have all of the things that come with that it's difficult for customer for prospective customers to do business with those folks. So you have kind of the church and that the rash that's going on with the larger the larger providers that are out there are the ones that have been around a little longer and then you have the smaller customers, which it's really difficult to get through the regulatory.
Gates to get the deal done for these banks. So that's what I would say contributed to the wind right for us right now.
Very nice thank you for that and then maybe we just dig into your technology initiatives a little bit I know you guys are always doing a lot, but we talked about this in a <unk> in the past maybe a little reminder, I I know you know you just know, but things going on whether it's moving workloads public cloud streamlining code basis things like.
That made me just talk through what you're doing internally and then progress there and then.
The the influence on gross margin overtime. Thanks, a lot.
But once you talk about the products and then you.
You can tell you about the gross margin improvement finger sans.
Sure. So thanks Sanders for the for the question.
I mean, you pointed out a few of them the truth of the matter is that if you go back over the 19 history of the company right that it is.
Of her standing still right, we never kind of get into this kind of legacy mindset, where we're just kind of milking the asset and so we're always pushing it forward, whether that's the product and the the code itself or the underlying infrastructure, how we even think about going to market and supporting our customers and so I would say that.
The company, we're just really focused everyday on look there are some very big initiatives, whether it's a cloudmakers and things like that but there's also lots of smaller things.
That it's kind of like the compound interest of just doing the right things from being good operators every single day that add up and that could be making sure that we chase out complexity of processes. It kind of naturally happens is you get better and making it simpler to do business with us.
Could it be that way, we prioritize work and having a clear line of sight into the choices that were making I think we've gotten really good at that and.
And that helps a lot that really pays dividends throughout the company.
As you add all of those things up.
We're excited about some of the opportunities that lie ahead of US also in areas like artificial intelligence and things like that in terms of just helping us be better operators, but also in terms of what that might mean for our products and flow early to really say exactly how that's going to play out but but.
We see some opportunity there so it's a lot of things stacked one on top of the other that and that also makes it for a sustainable.
Wave of operating rate is not just kind of like one big swing of the axe right, but it's something that we can do repeatedly.
Yes, I need to run the gross margin initiatives you touched on one of them and that's one that is not going to have an immediate impact of the P&L you've gotta look out three to four years before that starts to have material impact positively on gross margin and thats migrating workloads out to the cloud we're doing that in concert with our customers with their feedback and making sure there is absolutely zero disruption.
So what's happening in a very gradual fashion, we migrated about 25% of the workloads over last year and this year, we're going to do about another 25% and you can assume that the next few years following will get the remainder of it.
Shorter term you've you've obviously seen that we've shown some pretty significant increase in gross margin I think it's about 320 basis points year over year. Most of that is driven by things like migrating some of ours tasks to our global workforce and you can't do that without doing it with process improvement. So we've been able to drive.
<unk> improvement across the organization make things much more repeatable predictable and as a result able to effectively utilize our global workforce much more so than we were able to even 12 months ago. We're doing the same thing with support.
And then we're also doing a lot with pricing and packaging and that's not only on new deals, but also through renewals, we're using tools that we have internally.
And obviously different levers to make sure that as we're going through the renewal process, where extract in the value that we are providing to our customers through that process and doing so in a much more thoughtful way. So all of those are adding up you start stacking those on top of each other and that's what drives the type of gross margin accretion that you've seen from us over the last three to four quarters.
Very good very helpful. Thank you guys. Thank you Andrew Andrew.
There are no further questions at this time.
And gentlemen, thank you for participating this concludes today's call you may now disconnect.
Please wait the conference will begin shortly.
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