Q3 2023 Q2 Holdings Inc Earnings Call

Good afternoon. My name is Caitlin that'll be a conference operator today.

At this time I would like to welcome everyone to the queue to holdings third quarter 2023 financial results Conference call.

Ah lines have been placed on mute to prevent any background noise after.

After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question. Please press the star the number one on your telephone keypad.

I would now like to turn the call over to Josh Yankovich Investor Relations. Sir please begin.

Thank you operator, good afternoon, everyone and thank you for joining us for our third quarter of 2023 conference call with me on a call today from Affleck, our CEO, David Miha are CSO, Jonathan Pryce, our executive Vice President of strategy in emerging businesses incur Coleman, our president 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 future holdings after 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 babysat on the Investor Relations section of our web site, including our quarterly report on Form 10-Q for the third quarter of 2023, and subsequent filings and the press release distributed this afternoon regarding 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 investor should not assume that these statements will remain operative at a later time and we undertake no obligations to update any such forward looking statements discussed in this call.

Also unless otherwise stated all financial measures discussed on this call will be under 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 web site and in our form 8-K filed today with the SEC.

We have also published additional materials related to today's results on our Investor Relations website, Let me now turn the call over to Matt.

Thanks, John he'll start today's call by sharing our third quarter results and highlights from across the business will then hand, it over to Jonathan to discuss a few highlights are emerging businesses. David will then discuss our financial results and guidance in more detail.

In the third quarter regenerated non-GAAP revenue of $155 million up 7% year over year. We also continued to deliver on our commitment to improve non-GAAP profitability in the quarter.

With adjusted EBITDA $19.7 million or 12.7% of revenues and improvement over 500 basis points of adjusted EBITDA margins over the prior year quarter <unk>.

This is the financial results, we have broad sales success in the quarter as we've highlighted for several quarters, the rising interest rate environment and events in the banking industry have led financial institutions to prioritize attracting retaining and growing deposits that focus on deposits is leading financial institutions of all sizes to reevaluate their <unk>.

Customer facing technology.

Which is translating into a strong pipeline for digital banking and we believe our digital banking portfolio is uniquely equipped to help financial institution to grow deposits and drive profitability from industry, leading retail and commercial solutions that help our customers wind valuable deposit accounts to cue to innovation studio, which helps drive customer engagement retention.

And non interest fee income and was once again, a key driver in every digital banking wind from the quarter.

This focus on deposits drove a number of key deals in the third quarter, while the digital banking side, we had a broad mix of retail and commercial deals across our market segments, including two of the top 10 largest digital banking deals in company history.

We also side meaningful expansion deals with multiple enterprise in tier one customers for our relationship pricing solutions. What are the highlights was a net new digital banking deal with the top 20 U S bank that has more than $200 billion in assets.

The bank selected our digital banking platform to serve their critical small business and commercial customers. This is a significant win on several levels in terms of annualized recurring revenue. This customer is among our top 10 largest digital banking deals of all time historically banks of this size of relied on a mix of homegrown technology.

For digital banking, but the current focus on growing deposits is pushing financial institutions of every size to invest in best in class technology, improving their user experience and delivering innovation faster than they can on their own.

And the depth of our commercial product said, along with our proven ability to deliver implement and support commercial products at the enterprise level helped us earn our way into and ultimately win the significant opportunity.

The second deal I want to highlight is a comprehensive platform deal with a $20 billion Bank. There was also a top 10 deal a company history in terms of annualized recurring revenue.

This is another example of a large bank that felt that was critical to upgrade to a technology platform that would allow them to move fast and differentiate themselves and the current economic environment.

And in this case, they selected us to be the single platform to serve their entire customer base across retail small business and commercial.

In addition to contributing to strong demand for our solutions some of the changes in our customers operating environments are creating new opportunities for innovation.

We recently announced two new product innovations designed to address these opportunities for our customers.

First we've talked a lot about the focus on deposits today. Many of our customers are evaluating new creative ways to differentiate themselves reached new customers beyond their traditional markets and acquire a support retail deposit relationships profitably.

To help address these challenges, we recently announced Q2 fabric a turnkey direct bank offering which combines our digital banking front end with a lightweight core of helix. This is a great example of our ability to innovate and quickly respond to new market dynamics and Jonathan provide more detail on queue to fabric shortly.

Another area of focus for our customers today is artificial intelligence and to help them capitalize on that opportunity. We recently announced the Andy co pilot platform. The copilot solution purpose Bill for bankers. We originally built Andy in 2017 is a chat driven assistant within our relationship pricing solutions to the.

<unk> is used by more than 29000 bankers across 150 financial institutions, where it delivers bank client and deals specific pricing recommendations in real time as commercial bankers designed their deals for AI to deliver real value. It has to be powered by data and knowledge that is specific to <unk>.

Our industry and customers and via the Andy Copilot platform, we will combine our vast amounts of digital banking and lending data with a proven co pilot that can deliver the right information to the right banker at the right time, helping make our customers more effective and efficient across a number of critical use cases within the queue.

Two product portfolio and beyond while.

While Andy has been in production inside of a relationship pricing for years, both Q2 fabric and the Andy Copilot platform are early in their product life cycles over the coming months will be partnering with early adopters to further developed and refined both solutions and we look forward to sharing relevant updates on future calls.

We have always been an innovation driven company and both Q2 fabric and the Andy Copilot platform demonstrate our ability to leverage and develop our unique technology assets to solve real timely challenges our customers face in the market.

With that I'll hand, the call over to Jonathan to share a few highlights from our queue to innovation studio in helix teams.

Thanks, Matt I'll start with Q2 innovation studio, which had a particularly strong quarter driven in part by the tremendous engagement and activity at connect our annual client confidence.

We have record adoption in terms of our customers partnering with Phanteks almost one.

100, new partnership deals in the quarter, representing 40% growth over our previous best quarter of adoption.

The benefit of this adoption is that it can lead to apply we will affect.

The more partners and customers use innovation studio is stronger than ecosystem becomes which in turn can drive meaningful customer outcomes increase retention and differentiate Q2 in the digital banking sales process.

As Matt mentioned Q2 innovation studio has become an essential part of our value proposition and was once again, a key driver and all of our additional banking wins from the quarter.

We're particularly excited that the top 20 bank, we signed plans to make you two innovation studio a core component of its digital strategies, where it will use innovation studio to deliver innovative fee generating products to small business and commercial customers.

Shifting to helix, we had a few noteworthy highlights I would like to share.

First we had a meaningful cross sell with one of our largest clients. We worked with this customer to develop a new piece of functionality for the helix platform that will allow them to have full control over transaction authorization to drive a better customer experience and improved fraud management.

The addition of this new products will drive an immediate left and the monthly recurring revenue associated with this partnership and it also gives us a new piece of functionality that differentiates helix from other embedded finance providers and can be krossel into other key helix customers and prospects.

Second we had a meaningful customer go live in the quarter with a bank that launched a new digital brand powered by the helix core technology.

This customer made the decision to launch a new brand in order to attract digital first consumers outside of its traditional market with targeted deposit products as a way to drive new customer acquisition and grow deposits.

This is a trend we're seeing more and more and it's exactly the use case and led us to develop Q2 fabric.

Given the current priority on deposits.

Many financial institutions are looking to launch new digital only products like Standalone high yield savings accounts that they can use to attract and profitably serve retail depositors to.

To execute this strategy financial institutions require a lightweight flexible core technology that allows them to launch easily onboard new customer seamlessly and then profitably serve and grow those retail relationships over time.

The healer core platform is built to serve this purpose.

It operates in real time, it's designed for digital only customers and it can support retail deposit accounts at a fraction of the cost of traditional course.

And it is a proven highly scalable technology that supports more than $15 million and users today.

Three Q2 fabric, we will use the huguette score combined with our best in class digital banking front end to give financial institutions, a turnkey fullstack solution to easily launch their own digital deposit products.

It is very early innings for Q2 fabric, but we believe it's an exciting new way to take helix to market with financial institutions.

And we believe that over the long term due to fabric has tremendous potential to help our customers differentiate themselves diversify their strategies and grow deposits.

With that I'll hand, the call over to David to discuss our financial results from the quarter.

Thanks, Jonathan when we began the year, we communicated our focus on delivering accelerated growth in subscription revenue coupled with significant expansion of our margins in cash flow through three quarters of the year. We've made good progress on these focus areas I will now discuss our financial results with emphasis on these priorities and conclude with updated.

<unk> for the fourth quarter of 2023.

non-GAAP revenue for the third quarter was in line with our expectations coming in at the mid point of our guidance with.

With adjusted EBITDA once again exceeding the high end of our guidance due to an increasing mix of subscription revenue and continued execution, an accelerated cost efficiencies across the business.

Additionally, our growth in subscription.

Backlog, an average selling price for the quarter benefited from our continued net new booking success highlighted by two digital banking wins, which were among the top 10 largest deals in company history.

Total non-GAAP revenue for the third quarter was $155 million, an increase of 7% year over year and flat sequentially. The.

The year over year increase was driven by growth in subscription based revenue, which is up 11% year over year.

As we previously communicated.

Quarter revenue growth rates were expected to temporarily come down.

The annual growth rate was pressured by a high number of customer go lives and associated revenue concentrated in the third quarter of 2022.

This year's go lives are concentrated in the fourth quarter and as a result, we expect a reacceleration of revenue and subscription growth as we close out the year, which is reflected in our guidance.

The relatively flat sequential revenue was the result of subscription revenue growth offset by an anticipated decline in the usage based revenue associated with normal seasonality, we observed within our helix business.

Our subscription revenue for the quarter was 77% of total revenue.

Company record and up from 75% in the previous quarter and 74% of total revenue in the prior year period.

The year over year and sequential growth of subscription revenue were driven by an increase in crossroads solutions within our digital banking business.

Transactional revenue represented 10% of total revenue for the quarter down from 11% in both the previous quarter and the prior year period.

The decline in transactional revenue as a percent of total revenue was a result of the trends we started to observe last year, including continued secular slowing of bill pay as well as reduced growth and helix base transactional revenue.

As expected. We also saw a continued decline in services and other revenue.

This was the result of lower revenue from discretionary services as well as a decline in helix pass through revenue, which is categorized and this revenue line item.

During the quarter, we added more than 300000 users to our digital banking platform ending the quarter with over 22 million registered users an increase of 5% year over year.

Total annualized recurring revenue, we're totally RR grew to $693.6 million up 9% year over year previously we referred to total IRR as <unk>.

Going forward, we will be disclosing subscription <unk> as well.

Our subscription.

Grew to $547 million.

Up 14% year over year.

Which was driven largely by net new deals with in our digital banking business and continued expansion with existing customers.

Given the high concentration of go lives that occurred in the third quarter of last year, we anticipated a deceleration and year over year totally RR growth for the third quarter, followed by Reacceleration in the fourth quarter.

We also expect subscription AAR growth will exceed total AOR growth for the remainder of the year and into 2024.

We ended the quarter with total backlog of approximately $1.6 billion. This represents year over year growth of 13% and sequential growth of 2% or $37 million a.

The year over year in sequential increase was primarily attributable to strength and net new bookings, particularly within digital banking, where we saw increases in ASP and contract duration as well as a strong renewable performance.

Gross margins were 53.9% for the third quarter up from 52.1% in the prior year period and down from 54.2% in the previous quarter.

The year over year improvement in gross margin was driven primarily by a favorable mixed in revenue towards our higher margin subscription based business. In addition to cost efficiencies delivered over the last 12 months.

The sequential decline in gross margin was attributable to an increase in implementation costs during the quarter.

Total operating expenses for the third quarter, where $71 million or.

445.8% of revenue.

Compared to $69.8 million or 48.2% of revenue in the third quarter of 2022, and $72.9 million or 47.1% of revenue in the second quarter of 2023.

Year over year and sequential decrease in operating expenses as a percent of revenue were driven predominantly from improved cost scaling to revenue within sales and marketing as a result of operational efficiencies.

The year over year decrease also benefited from improve utilization of our global workforce within R&D.

In addition, we saw sequential decline of G&A expenses associated with lower third party costs.

As a reminder, or annual customer conference took place in the second quarter, which resulted in sequential fever ability within sales and marketing.

Total adjusted EBITDA was $19.7 million for the third quarter up from $10.8 million in the prior year period, and $17 $6 million in the previous quarter.

This quarter's results demonstrate an improvement of over 500 basis points and adjusted EBITDA margin from the prior year period, driven by revenue mix and cost initiatives already discussed.

We ended the third quarter with cash cash equivalents in investments of $290.8 million up from $280 million at the end of the second quarter.

During the quarter, we generated cash flow from operations of $16.8 million.

The first nine months of the year, we've also generated $9.8 million a free cash flow.

We anticipate driving meaningful free cash flow in the fourth quarter align with historical seasonality.

Which we expect to results and an adjusted EBITDA to free cash flow conversion of over 60% for the full year.

Let me wrap up by sharing our fourth quarter and updated full year guidance.

We forecast fourth quarter non-GAAP revenue in the range of $160.3 million to $163.3 million.

And full year non-GAAP revenue in the range of $622.5 million to $625 $5 million representing year over year growth of approximately 10%.

We forecast fourth quarter, adjusted EBITDA of $21.2 million to $23 $2 million.

And we're raising our full year 2023, adjusted EBITDA guidance to $75 million $77 million representing.

Representing approximately 12% of non-GAAP revenue for the year.

In summary through the third quarter, we deliver non-GAAP revenue results at the mid point of our guide and adjusted EBITDA results over our expectations.

We continue to see subscription revenue, becoming a more meaningful mix of our business anticipate our subscription revenue growth will accelerate in the fourth quarter.

Over the course of the last year, we've demonstrated our ability to drive meaningful expansion in gross margin and adjusted EBITDA margin, which gives us the confidence to raise our adjusted EBITDA outlook for the remainder of the year.

As we continue to go through our 2024 planning process I want to share some preliminary expectations.

Based on the booking success, we've observed year to date or sales pipeline and the strength of leading indicators such as subscription.

We anticipate that our subscription revenue growth rate will be at least 13% for the full year 2024.

We expect this will result in a greater mix of higher margin revenue in 2024, and when coupled with our efforts to drive greater cost efficiencies, we remain confident in our ability to achieve our previously communicated rule of 30 late in 2024 and drive total accompany adjusted EBITDA of as <unk>.

Least $105 million for the full year of 2024.

With that I'll turn the call back over to Matt for his closing remarks.

Thanks, David I'll conclude by reiterating a few key takeaways from the quarter first with all the focus on deposit growth continued to drive demand in sales success, we had a broad range of net new an expansion wins highlighted by two of the top 10 largest digital banking deals in company history, we're continuing to innovate with new solutions.

Is that we believe can solve real pressing problems for our customers and create new ways for Q2 to deepen our own customer relationships over time.

And we're surrounding our technology with a superior customer experience given the criticality of digital in this environment effective software delivery and customer support are at a premium.

And there are important differentiators for us all of these things combined to create a business that is extremely durable and given the strength of our pipeline I believe we will finish the year strong and position ourselves for continued growth and profitability improvements in 2024 and beyond Thank you and I'll hand, it over to the operator for questions.

And as a reminder, anything you would like to ask a question. Please press the star.

I think the number one on your telephone keypad.

Our first question comes from the line of Alec Skylar with Raymond change Your line is open.

Great. Thank you.

So it's starting starting with the top 20 win matter Kirk I. Just wanted to you just talk a little bit more about that from a competitive standpoint, what was the customer using before was this a formal RFP why you may have one versus the competitors and then just in terms of do you expect that to contribute just given was booked in third quarter to to anything before the end of 2024.

Thanks.

What was the last part of that you cut out on the expect before the end of it.

If you could if that the time of that implementation can can contribute to the revenue in 24.

Yeah. So.

We don't mentioned, who the competitors are but on a deal like that anybody who had a commercial product within and competition and it's really a testament to the work we've put into our commercial banking offering.

Over the last 19 years candidly in the work we've done not just around features and functions, but how to deliver it supported Kansas systems up and running it seems like there's a lot of problems with other vendors in the space with those and so.

When a deal like that it's.

It's a highly competitive deal really proud of the work the team did not just the sales team, but the whole company.

And it's our products are really catching stride with the differentiation around a single platform the way it looks on a mobile phone a tablet and a desktop be able to provide a next generation experience to the commercial customers that that financial institution and as I said in the prepared remarks.

A lot of these.

Larger financial institutions are realizing that they can't keep pace with technology providers like us and the expense around having people that do the development and engineering becomes too much for them. So I think this is the beginning of of more opportunities up market. Obviously, we signed another $20 billion bank for the full suite, there's a lot of expansion on.

Utilities within that as far as the go live at the end of the year of next year, there's a chance for the fourth quarter, but we've got to get a little further along in the project. These guys take a little more time than others, but really proud of the team and will contribute to twenty-five obviously, but really proud of the team and the work that we've done and I'm really excited about working with the financial station.

Alright, great color and great when Dave.

David follow up for you on the raised free cash flow outlook and can you just helped bridge kind of what's driving that better EBITDA conversion and then in terms of is added right. It's a good place to start in terms of thinking about the free cash flow conversion going forward.

Kayla: Good afternoon, my name is Kayla and I will be your conference operator today At this time, I would like to welcome everyone to the Q2 Holdings Third Quarter 2023 Financial Results Conference call All lines have been placed on mute to prevent any background noise After the speakers are marked, there will be a question and answer session If you'd like to ask a question, please press the star, the number one on your telephone keypad I would now like to turn the call over to Josh Yankovich, investor relations, sir, please begin Thank you operator, good afternoon everyone and thank you for joining us for our third quarter 2023 conference call With me on the call today, our math lake, our CEO, David Mehok, our CSO, Jonathan Price, our executive vice president of strategy and emerging businesses, and Kirk Coleman, our president will join us for the Q&A portion of the call This call contains four lucky 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 most contemplated by these four looking statements, and we can give no assurance that such expectations or any of our four looking statements will prove to be correct Important factors that could cause actual results to differ materially from those reflected in the four looking statements are included in our periodic reports filed with the SEC copies of which may be found on the investor relations section of our website, including our quarterly report on form 10Q for the third quarter of 2023 and subsequent filings, and the press release distributed this afternoon regarding financial results and will discuss today Four 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 obligations to update any such four looking statements discussed in this call Also, unless otherwise stated, all financial measures discussed on this call will be on a non-GAAT basis.

Yeah, Alex obviously this has been a focus area of ours and last year was a pivot point forest regenerated about $6 million free cash flow in 2022.

This year are working capital management has been.

Outstanding across the board, both with our payables and receivables and our captain work Capex light business, you know that and we've managed our capex.

Very judiciously throughout the year and again, we think the 60%.

Should be viewed favorably is viewed favorably internally and we're going to continue to drive that forward into 2024.

Alright, great. Thank you.

And your next question comes from.

As in Matt.

P. I G. Your line is open.

Yeah. Good afternoon. Thanks for taking my question you mentioned that innovation studio was was certainly key to most if not all the wins in the quarter, but curious from here forward now that you have bought more customers using it a number of partners also contributing.

Is it something that is a sort of a meaningful revenue driver in and of itself or is this just another key key component of the platform to sort of upsell across sell throughout your customer to get more total users and more total usage of the platform.

The amount of shopping it is.

Both I mean, we're clearly seeing an impact on net new wins, and obviously with existing customers. It allows us the opportunity to engage more deeply with them and Abby solutions, but the revenue impact is starting to grow obviously a couple of years ago. When we went GE witness we were starting from zero and now we're starting to see more and more dollars flowing.

Kayla: A discussion of why we use non-GAAT financial measures and a reconciliation of the non-GAAT measures to the most comparable GAAT measures is included in our press release, which may be found on the investor relations section of our website, and in our form 8K file today with the SEC. We have also published additional materials related to today's results on our investor relations website.

From the economic relationship that we strike with these partners as as the banks and their end users sign up for it. So it will be a more meaningful revenue contributor over time, but.

But the strategic value of it obviously it goes well beyond the revenue contribution and I think it's worth mentioning too that the revenue we generate from this model is different than historical partnerships, which.

Josh Yankovich: Let me now turn the call over to Matt.

Matt Flake: Thanks, Josh.

Matt Flake: I'll start today's call by sharing our third quarter results and highlights from across the business. I'll then hand it over to Jonathan to discuss a few highlights from our emerging businesses.

In this model, it's all net revenue so the margin profile of these incremental dollars is pretty attractive. So it will take some time for this to be very material from a revenue standpoint, but we're starting to see as I mentioned in the in the script that these flywheel is starting to turn and we're excited about not only the strategic value of it but the revenue implications down the road.

Matt Flake: David will then discuss our financial results and guidance in more detail. In the third quarter we generated non-GAAT revenue of $155 million, up 7% year over year. We also continued to deliver on our commitment to improve non-GAAT profitability in the quarter. With the adjusted EBITDA of $19.7 million or $12.7% of revenue, an improvement over 500 basis points of adjusted EBITDA margin over the prior year quarter. In addition to the financial results, we had broad sales success in the quarter.

Very helpful. And then when you look at these very largest customers that you've signed both this quarter in in in recent quarters.

You're going to add your functionality are you truly sort of ripping on replacing all of their home grown functionality.

Matt Flake: As we've highlighted for several quarters, the rising interest rate environment and events in the banking industry have led financial institutions to prioritize attracting, retaining, and growing deposits. That focus on deposits is leading financial institutions of all sizes to re-evaluate their customer facing technology, which is translating into a strong pipeline for digital banking. We believe our digital banking portfolio is uniquely equipped to help financial institutions grow deposits and drive profitability. From industry leading retail and commercial solutions that help our customers win valuable deposit accounts to Q2 Innovation Studio, which helps drive customer engagement, retention, and non-interest fee income.

Or some of these just sort of sitting out in front being attitude of adding those nexgen capabilities, but not necessarily going in and doing the most basic sort of blocking and tackling there. So just curious on how big the footprint is and how much you know sort of future upsell Cross so comes along side of those.

Yes, as I've talked about on the larger the bank you get the more they make a decision on the product for the business lines. So commercial makes a decision on the commercial product retail makes a decision on a retail product.

It's usually a full rhythm replace cause you can't confuse your customers with multiple systems.

And the expansion opportunity is tremendous if you execute on the delivery and provide the service that you think that we.

Matt Flake: And was once again a key driver in every digital banking win from the quarter. This focus on deposits drove a number of key deals in the third quarter. On the digital banking side, we had a broad mix of retail and commercial deals across our market segments, including two of the top 10 largest digital banking deals in company history. We also sign meaningful expansion deals with multiple enterprise and Tier 1 customers for our relationship pricing solutions.

Set the bar to provide so I think the larger the deals are you have to look at them as.

One win and then there's a potential two to three more expansion whinge, whether it's relationship pricing retail small business and those are all those are all greater opportunities for us but it also is a testament to we are winning in the best in class feature functionality to win these deals because you're not going to move your commercial customers to a subpar products. So all.

Matt Flake: One of the highlights was a net new digital banking deal with the top 20 US banks that has more than 200 billion in assets. The banks selected our digital banking platform to serve their critical small business and commercial customers. This is a significant win on several levels. In terms of annualized recurring revenue, this customer is among our top 10 largest digital banking deals of all time. Historically, banks of this size have relied on a mix of homegrown technologies for digital banking.

Those things are big Tailwinds for us as I said in the prepared remarks that the durability of this business you get through 2425, it just sets up really nicely for us with.

With these opportunities that are out there and we're competing favorably.

Especially on the commercial side of the business right now.

Great. Thank you.

Thanks, Matt Smith.

Smith.

[noise] next question comes from the line is Terry.

Matt Flake: But the current focus on growing deposits is pushing financial institutions of every size to invest and invest in class technology, improving their user experience and delivering innovation faster than they can on their own. And the depth of our commercial products set along with our proven ability to deliver, implement and support commercial products at the enterprise level helped us earn our way into and ultimately win the significant opportunity. The second deal I want to highlight is a comprehensive platform deal with the $20 billion bank that was also a top 10 deal on company history in terms of annualized recurring revenue.

True.

Each of your line is open.

Great. Thanks, so much for taking the question to this is Bobby down for Terry first one son renewals I'm not sure how much there was three Q, but can you talk about Ah renewals and how they are looking in terms of expanded products are they increasing usage paring back et cetera, and then I had one follow up thank you.

Crossover perspective, we had a 20 plus percent lift year over year from the quarter. The third quarter last year, you'll be getting to see we had a we had a big client confidence in may which always results in the excitement around the new products and the offerings that we're having it also extends.

Contracts as well so I think you're gonna see the fourth quarter is historically, a really large renewal quarter for us and with renewals you typically get more cross sales. So I think that the renewal numbers this year.

Matt Flake: This is another example of a large bank that felt it was critical to upgrade to a technology platform that would allow them to move fast and differentiate themselves in an current economic environment. And in this case, they selected us to be the single platform to serve their entire customer base across retail, small business and commercial. In addition to contributing to strong demand for our solutions, some of the changes in our customers operating environments are creating new opportunities for innovation.

Really happy with the customer success team and what they've been doing as well as the delivery and availability teams because customers want to renew with us they don't want to switch so.

I think you're going to see a solid with renewable numbers. This year for us in the fourth quarter, obviously, there's a lot to get done a lot of those contracts come up we're headed down on those so renewables are looking very good for 2003.

Matt Flake: We recently announced two new product innovations designed to address these opportunities for our customers. First, we've talked a lot about the focus on deposits. Today, many of our customers are evaluating new creative ways to differentiate themselves. Reach new customers beyond their traditional markets and acquire and support retail deposit relationships profitably. To help address these challenges, we recently announced Q2 fabric, a turnkey direct bank offering which combines our digital banking front end with the lightweight core of a helix.

Foreshadowing I think 24 is going to be solid as well and then the cross sell that goes with it should be.

It should be.

A rather large quarter for us on the cross sell side with those renewals.

Very helpful. Thank you and then any change in the last 90 days associated with length of sales cycles clothes rates on large deals expansion sales et cetera.

Thanks Bye.

When rates are where they have been this whole year right around the range they've stayed at so we're really happy with that.

Matt Flake: This is a great example of our ability to innovate and quickly respond to new market dynamics. And Jonathan will provide more detail on Q2 fabric shortly. Another area of focus for our customers today is artificial intelligence. And to help them capitalize on that opportunity, we recently announced the Andy Copilot Plus. A Copilot solution purpose-built for bankers. We originally built Andy in 2017 as a chat-driven assistant within our relationship pricing solutions. Today is used by more than 29,000 bankers across 150 financial institutions where it delivers bank, client, and deal specific pricing recommendations in real time as commercial bankers design their deals.

And feeling really good about that.

The customer the wind rates out there, obviously, especially up market I think they are above 50%.

So I feel really good about the wind rates.

Matt Flake: For AI to deliver real value, it has to be powered by data and knowledge that is specific to our industry and customers. And via the Andy Copilot Plus, we will combine our vast amounts of digital banking and lending data with a proven Copilot that can deliver the right information to the right banker at the right time, helping make our customers more effective and efficient across a number of critical use cases within the Q2 product portfolio and beyond.

Thank you.

And your next question comes from.

Parker Lane would stifle your line is open.

Yeah. Thanks for taking my question here I wanted to ask you a little bit about fabric here seems pretty interesting out of the box I'm curious in particular to here, who you're targeting with the solution is this is primarily going to be a sort of net new customers that you're going after or is it something that will appeal to your existing base the customer.

<unk>.

Yeah, I'll have Jonathan answer that question, he is and he's running the business and so and he has done the work on this I'll, let him cover that yes.

Yeah. So Parker when we think about the initial phase of the go to market here. We've received inbound inquiries you know in a world where banks and credit unions are really focused on low cost deposit gathering opportunities in a digital only channel. We're seeing a lot of inbound inquiries, which is exciting and that could lead to some net new institutions being <unk>.

Part of the initial phase of Q2 fabrics launch in the market.

Matt Flake: While Andy has been in production inside of a relationship pricing for years, both Q2 Fabric and the Andy Copilot platform are early in their product life cycles. Over the coming months, we'll be partnering with early adopters to further develop and refine both solutions, and we look forward to sharing relevant updates on future calls.

But candidly I think the most.

Near term an exciting opportunity for us is within our base those are existing queue to customers, where we have strong relationships. We have the digital banking platform up and running and most of those cases, and so that that to us is where we're seeing the most opportunity and where we think the early phase of this will come from over time I think it will be interesting to.

Matt Flake: We have always been an innovation driven company, and both Q2 Fabric and the Andy Copilot platform demonstrate our ability to leverage and develop our unique technology assets that's to solve real, timely challenges our customers face in the market.

See the demand environment and how durable it is because we think this environment is here to stay around at the orientation around their deposits and so net new can be more prevalent over time, but in the near term. We really are focused primarily on the existing customer base.

Jonathan Price: With that, I'll hand the call over to Jonathan to share a few highlights from our Q2 Innovation Studio and Helix teams. Thanks, Matt. I'll start with Q2 Innovation Studio, which had a particularly strong quarter, driven in part by the tremendous engagement and activity at Connect, our annual client conference. We had record adoption in terms of our customers partnering with Fintechs, almost 100 new partnership deals in the quarter, representing 40% growth over our previous best quarter of adoption.

Understood. Okay, and then on Andy another interesting announcement there no. It's very very early days not even in full production, yet, but [noise] how are you good.

C R. What's the reception been amongst your customers to some of the plans.

Plans you brought out there from a generative AI standpoint, and is it too early just to give up monetization or do you have.

Some framework for how you'll you'll look to monetize.

Jonathan Price: The benefit of this adoption is that it can lead to a flywheel effect. The more partners and customers use Innovation Studio, the stronger the ecosystem becomes, which in turn can drive meaningful customer outcomes, increase retention, and differentiate Q2 in the digital banking system. As Matt mentioned, Q2 Innovation Studio has become an essential part of our value proposition, and was once again a key driver in all of our digital banking wins from the quarter.

Okay partners perfect take that so yeah, it's a little early on the monetization what we can tell you though is that we've had really warm reception from our customers as we've demo some of life's code that we've got built for this we have to remember that this is getting built.

Jonathan Price: We're particularly excited that the top 20 bank we signed plans to make Q2 Innovation Studio a core component of its digital strategy, where it will use Innovation Studio to deliver innovative, feed generating products to small business and commercial customers.

With assets and we've had a production for a long time, if we think about Andy inside.

Relationship pricing tool really and now using that knowledge.

Model.

The enhanced generative AI capabilities coupling it with a substantial amount of data that we have kind of this is Peter solutions that our bank ready their bank tested right. They provide all the security and compliance and answered the bell.

Jonathan Price: Shifting to Helix, we had a few noteworthy highlights I'd like to share. First, we had a meaningful cross-cell with one of our largest clients. We worked with this customer to develop a new piece of functionality for the Helix platform that will allow them to have full control over transaction authorization to drive a better customer experience and improve fraud management. The addition of this new product will drive an immediate lift in the monthly recurring revenue associated with this partnership, and it also gives us a new piece of functionality that differentiates Helix from other embedded finance providers and can be cross-sold into other key Helix customers and prospects.

A lot of the items frankly that.

And invited mentioned in his executive order yesterday, so we feel good about our position in that way.

Download this for a large group of bankers that was here with us in Austin last week about 125 got a very positive reception from that that we were addressing real and practical problems.

That are a drag on their business today and a good example of that is how do we make their commercial bankers, even more productive by reducing.

The amount of administrative tasks.

40% to 60% of a commercial bankers day is.

Kind of repetitive administrative things so that's a starting point for us.

Jonathan Price: Second, we had a meaningful customer go live in the quarter with a bank that launched a new digital brand powered by Helix Core technology. This customer made the decision to launch a new brand in order to attract digital first consumers outside of its traditional market with targeted deposit products as a way to drive new customer acquisition and grow deposits. This is a trend we're seeing more and more and it's exactly the use case that let us to develop Q2 fabric.

I could tell you in the room that they had a lot of different ideas of where that could go. So first things first we gotta stay focused on on this first kind of beta phase.

We've got a number of customers signed up for that and we will keep you guys abreast of what we're up to as we get into a first quarter of 24.

Sounds good I appreciate the feedback here.

And as a reminder, if you would like to ask a question. Please press the star.

Jonathan Price: Given the current priority on deposits, many financial institutions are looking to launch new digital only products like standalone high yield savings accounts that they can use to attract and profitably serve retail depositors. To execute this strategy, financial institutions require a lightweight flexible core technology that allows them to launch easily on-board new customers seamlessly and then profitably serve and grow those retail relationships over time. The Hewitt's core platform is built to serve this purpose.

And the number one.

Pat.

Your next question comes from the line.

Roswell with RBC Your line is open.

Yes, good evening, it's Matt Roswell once again perlin congratulations on the next quarter.

A couple of questions first.

Get into the <unk> transaction revenue a little bit obviously, there's pressure from the macro environment.

Mind kind of talking about the bill pay sort of pressure, there and whether there's still pressure on the transactions associated with the helix clients.

Jonathan Price: It operates in real time, it's designed for digital only customers, and it can support retail deposit accounts at a fraction of the cost of traditional cores. And it is a proven, highly scalable technology that supports more than 15 million end users today. Through Q2 fabric, we will use the Hewitt's core combined with our best and class digital banking front-end to give financial institutions a turnkey, full-stack solution to easily launch their own digital deposit products.

Yeah sure, Matt and so we began talking about some of the pressures from you are seeing a little bit over a year ago and it has continued and we would leave a lot of dishes secondly, driven what.

What we've seen is volume slowdown fairly significantly across the board.

We were we were anticipating as we enter 2022, then we would see sort of mid single digit growth and it actually contracted slightly we've seen that trend continue throughout 2023.

And a lot of that is consolidation of spend it's using.

Jonathan Price: It is very early innings for Q2 fabric, but we believe it's an exciting new way to take Hewitt's to market with financial institutions. And we believe that over the long term, Q2 fabric has tremendous potential to help our customers differentiate themselves, diversify their strategies, and grow deposits.

Third parties and Fintechs to pay bills essentially outside traditional bill pay so again. The these are some of the macro drivers that we're seeing that are pressuring it and on the helix side of things.

There's been a obviously a broader impact defend texts writ large and we've obviously felt that in our helix business. We do have a very high concentration of large and texts, which are financially stable, they're doing great with us we've got great business, there, but we have seen the overall transactions from them coming.

David Mehok: With that, I'll hand the call over to David to discuss our financial results from the quarter. Thanks Jonathan. When we began the year, we communicated our focus on delivering accelerated growth and subscription revenue, coupled with significant expansion of our margins and cash flow. Through three quarters of the year, we've made good progress on these focus areas. I will now discuss our financial results with emphasis on these priorities and conclude with updated guidance for the fourth quarter of 2023.

Down and that's been reflected in both the transactional and then we do have a pass through business. That's that's also incorporated in our other than the services and other category. So those are the two areas really you'll see that pressure on the helix business.

David Mehok: Non-Gap revenue for the third quarter was in line with our expectations coming in at the midpoint of our guidance. With adjusted Hewitt Dow once again exceeding the high end of our guidance due to an increasing mix of subscription revenue and continued execution on accelerated cost efficiencies across the business. Additionally, our growth and subscription ARR backlog and average selling price for the quarter benefited from our continued net new booking success highlighted by two digital banking wins, which were among the top ten largest deals in company history.

Okay and on the on the 19th.

Revenue mix shift with the subscription revenue coming up.

Mixing products or banks being more willing to take a subscription deal as opposed to a license deal or are you all just.

He pushed back in that direction.

No amount I mean subscription is really the core solution for us I mean that is our platform solution. It's recurring in nature. These deals are typically about five and a half years and the basis of those deals is typically going to be the the subscription itself.

So this is this is the highest margin business that we have of those three.

David Mehok: Total non-Gap revenue for the third quarter was $155 million in increase of 7 percent year over year and flat sequentially. The year over year increase was driven by growth and subscription based revenue, which is up 11 percent year over year. As we previously communicated, third quarter revenue growth rates were expected to temporarily come down. The annual growth rate was pressured by a high number of customer go-lives and associated revenue concentrated in the third quarter of 2022.

Obviously by a wide margin.

And the mix up that we've seen there is a combination of all the strength that we've seen in that platform business that core digital banking, which we've been talking about <unk>.

Combined with some of the pressures that we've seen in those two other revenue category. So those two combined resulting in the mix up and again.

It gives us better visibility into.

Into the business and obviously mixes up to higher profit.

Okay and my final question is if the.

The cash conversion has come up nicely. If you talked about where do you see yourselves deploying that free cash flow going forward from here.

David Mehok: This year's go-lives are concentrated in the fourth quarter and as a result, we expect a re-exceleration of revenue and subscription growth as we close out the year, which is reflected in our guidance. The relatively flat sequential revenue was a result of subscription revenue growth, offset by an anticipated decline in the usage based revenue associated with normal seasonality we observed within our heel-ex business. Our subscription revenue for the quarter was 77 percent of total revenue, a company record and up from 75 percent in the previous quarter and 74 percent of total revenue in the prior year period.

Yeah, there's there's there's various options for us in terms of capital allocation of something that we focus on very acutely.

And consistently that is we're looking out obviously not just to next year, but over the next three years, we do have that that we're servicing that comes due in 2025% of 2026.

And obviously if the market allows there may be other opportunities down the road.

I would say that that wouldn't be something that we would be considering for awhile, but as we sit here today that is cash that we're gonna be using to deploy back into the business in some instances and also continue to work on our debt.

David Mehok: Both the year over year and sequential growth of subscription revenue were driven by an increase in cross-sold solutions within our digital banking business. Trans-Actional Revenue represented 10% of total revenue for the quarter, down from 11% in both the previous quarter and the prior year period. This was the result of lower revenue from discretionary services as well as a decline in helix pass-through revenue which is categorized in this revenue line item. During the quarter, we added more than 300,000 users to our digital banking platform, ending the quarter with over 22 million registered users and increase of 5% year-over-year.

And.

As you look out to 20 526, we've said this publicly before.

We feel we have the ability to service that debt and retire with the cash on our balance sheet combined with the cash and we're going to generate.

Excellent. Thank you very much thanks man.

And your next question comes from the line of Andrey.

Global market your line is open.

Hey, guys. Thanks for taking my question and I hopped on late so I apologize. If this my questions have been answered, but I Wonder I was wondering if you could dig into the cross sell motion a little bit talk about just the opportunity to go back in the existing base. Obviously you know this is something you guys do for some time.

But I'm just curious.

Given the expansion of the products that et cetera, the opportunity there remains for cross sell perspective, thanks, a lot guys.

Yeah. Thanks, Andrew.

And that hasn't been asked I think one.

One of the little you know, there's multiple levers to it if you think about the 80 customers that we have on digital banking above 5 billion in assets. Many of those are only using commercial or retail and they may not be using the full suite, where they may be using just small business and so there's a lot of opportunity to go cross sell another tier one deal essentially in there and then there are other.

David Mehok: Total annualized recurring revenue, or total ARR, grew to $693.6 million, up 9% year-over-year, previously we referred to total ARR as ARR. Going forward, we will be disclosing subscription ARR as well. Our subscription ARR grew to $547 million, up 14% year-over-year, which was driven largely by net new deals within our digital banking business and continued expansion with existing customers. Given the high concentration of go-lives that occurred in the third quarter of last year, we anticipated a deceleration in year-over-year total ARR growth for the third quarter.

The thing is is the.

The roadmap and the innovation that we have put out and we talked about AI, we talked about fabric, but.

Top cross sell products for us our security solutions are centric solutions are sort of our other AI driven solutions account opening innovation studio. So we've driven a lot. We've got a lot of products that we can go cross so even if you are running retail small business and corporate banking with us so.

It's it's the opportunity for US is really about the customer success team is going in establishing a strategic posture with our customers figuring out where they want to go and we have a solution for almost anything whether it's getting deposit in solving loan problems pricing relationships securing their data all those things are solutions that we have and so for us I think you're going to see.

David Mehok: Followed by re-acceleration in the fourth quarter. We also expect subscription ARR growth will exceed total ARR growth for the remainder of the year and into 2024. We ended the quarter with total backlog of approximately $1.6 billion. This represents year-over-year growth of 13% and sequential growth of 2% for $37 million. The year-over-year and sequential increase was primarily attributable to strength in net new bookings, particularly within digital banking, where we saw increases in ASP and contract duration, as well as a strong renewal performance.

You are an earlier, you're going to see a really strong fourth quarter of cross selling renewals.

And also those are getting tacked onto the new new to the new deals as well. So asp's are up still 35% I think over a year over year. So all of that adds to.

The cross sell but also it's profitable business for us and it's sticky and as differentiated so I feel really good about where we are from a product perspective, the maturity of our products. They experienced that customers have when they have them in our ability to deliver and support them at a world class level.

David Mehok: Gross margins were 53.9% for the third quarter, up from 52.1% in the prior year period and down from 54.2% in the previous quarter. The year-over-year improvement in gross margin was driven primarily by a favorable mix and revenue towards our higher margin subscription-based business in addition to cost efficiencies delivered over the last 12 months. The sequential decline in gross margin was attributable to an increase in implementation costs during the quarter. Total operating expenses for the third quarter were $71 million or $45.8% of revenue compared to $69.8 million or $48.2% of revenue in the third quarter of 2022.

Super helpful. Thanks, not and then maybe that actually Segway is willing to my next question, which is on product philosophy meet a conversation about you know the text. It was really good conversation about the text back a couple of months ago and the things you're doing there what.

What extent that influence product philosophy being able to roll out new products that are faster and faster pace, just asking because obviously I think.

As soon as externally like their product philosophy has picked up a little bit maybe if it's business as usual, but the love to hear your perspective, just product product pipeline glass and things like that.

<unk>.

Yeah, I mean, we try to marry you know, there's really three levers to product there's the what's going on in the world, which is which is on the cutting edge was AI or things happening that are innovative it could've been it could be.

David Mehok: And $72.9 million or $47.1% of revenue in the second quarter of 2023. The year-over-year, and sequential decrease in operating expenses as a percent of revenue were driven predominantly from improved cost scaling to revenue within sales and marketing as a result of operational efficiencies The year-over-year decrease also benefited from improved utilization of our global workforce within R&D In addition, we saw a sequential decline of GNA expenses associated with lower third-party costs As a reminder, our annual customer conference took place in the second quarter, which resulted in sequential favorability within sales and marketing Total adjusted EBITDA was $19.7 million for the third quarter, up from $10.8 million in the prior year period and $17.6 million in the previous quarter This quarter's results demonstrate an improvement of over 500 basis points in adjusted EBITDA margin from the prior year period driven by revenue mix and cost initiatives already discussed We enter the third quarter with cash, cash equivalents and investments of $290.8 million, up from $280 million at the end of the second quarter During the quarter we generated cash flow from operations of $16.8 million For the first nine months of the year, we've also generated $9.8 million of free cash flow We anticipate driving meaningful free cash flow in the fourth quarter, aligned with historical seasonality which we expect to result in an adjusted EBITDA to free cash flow conversion of over 60% for the full year Let me wrap up by sharing our fourth quarter and updated full year guidance We forecast fourth quarter non-gap revenue in the range of $160.3 million to $163.3 million And full year non-gap revenue in the range of $622.5 million to $625.5 million representing year-over-year growth of approximately 10% We forecast fourth quarter adjusted EBITDA of $21.2 million to $23.2 million And we're raising our full year 2023 adjusted EBITDA guidance to $75 million, $77 million Representing approximately 12% of non-gap revenue for the year In summary for the third quarter, we deliver non-gap revenue results at the midpoint of our guide and adjusted EBITDA results over our expectations We continue to see subscription revenue becoming a more meaningful mix of our business and anticipate our subscription revenue growth will accelerate in the fourth quarter Over the course of the last year, we've demonstrated our ability to drive meaningful expansion in gross margin and adjusted EBITDA margin Which gives us the confidence to raise our adjusted EBITDA outlook for the remainder of the year As we continue to go through our 2024 planning process, I want to share some preliminary expectations Based on the booking success we've observed here today, our sales pipeline and the strength of leading indicators such as subscription ARR, we anticipate that our subscription revenue growth rate will be at least 13% for the full year 2024.

User experience those types of things and then there's the things that like Bank of America Wells Chase offer those of the feature functions that you kind of have to add and then there's the operating efficiency of the business that the customer has and we try to marry those and figure out what the priorities are Kirk mentioned, we had 125 customers in.

A couple of weeks ago here in Austin, plus we had our client confidence with a thousand people where they share. The problems are trying to solve we tried to fall in love with the problems that are built solutions with our customers to solve those problems. So philosophically.

Delivering technology faster is critical and if you look at innovation studio. There is nobody that delivers a third party product into an environment as quickly as we do we have.

1400 outside developers outside of Q2 that are developing on our platform and integrating it and then we have 150 I think at least partners that are participating in the system. So we can just we continue to see.

Our ability to be open and listened to our customers and solve problems with them collectively with them as a differentiator for us and we're going to continue to do that.

Got it thank you very much mat.

Thanks, Andrew.

And there are no further questions at this time it gets will conclude snakes conference call and you may now disconnect.

Please wait the conference will begin shortly.

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Matt Flake: We expect this will result in a greater mix of higher margin revenue in 2024 and when coupled with our efforts to drive greater cost efficiencies, we remain confident in our ability to achieve our previously communicated rule of 30 late in 2024 and drive total company adjusted EBITDA of at least $105 million for the full year of 2024. With that, I'll turn the call back over to Matt for his closing remarks. Thanks David, I'll conclude by reiterating a few key takeaways from the quarter.

Matt Flake: First, we saw the focus on deposit growth continue to drive demand and sales success. We had a broad range of net new and expansion wins highlighted by two of the top 10 largest digital banking deals in company history. We're continuing to innovate with new solutions that we believe can solve real pressing problems for our customers and create new ways for Q2 to deepen our own customer relationships over time. And we're surrounding our technology with a superior customer experience, given the criticality of digital in this environment, effective software delivery and customer support are at a premium and they're important differentiators for us.

Matt Flake: All of these things combine to create a business that is extremely durable and given the strength of our pipeline, I believe we will finish the year strong and position ourselves for continued growth and profitability improvements in 2024 and beyond.

Operator: Thank you and I'll hand it over to the operator for questions. And as a reminder, if you would like to ask a question, please press the star than the number one on your telephone keypad.

Alex Sklar: Our first question comes from the line of Alex Skyler with Raymond James. Your line is open. Great, thank you.

Matt Flake: So starting with the top 20 win, Matt or Kirk, I just wanted to talk a little bit more about that from a competitive standpoint. What was the customer using before? Was this a formal RFP? Why you made one versus the competitors? And then just in terms of you, expect that to contribute just given it was both in third quarter to anything before the end of 2024. Thanks. What was the last part of that, how you cut out on the expect before the end of 2024?

Matt Flake: If you could, if that, the time of that implementation can contribute to revenue in 24. Yeah, so we don't mention who the competitors are, but on a deal like that, anybody who had a commercial product was in competition and it's really a testament to the work we put into our commercial banking offering over the last 19 years, candidly in the work we've done, not just around features and functions, but how to deliver it, support it, keep the systems up and running.

Matt Flake: It seems like there's a lot of problems with other vendors in the space with those, and so to win a deal like that, it's a highly competitive deal. We're really proud of the work the team did, not just the sales team, but the whole company. And it's our products are really catching stride with the differentiation around a single platform, the way it looks on a mobile phone, a tablet, and a desktop, being able to provide an exterration experience to the commercial customers at that point.

Matt Flake: And as I said in the prepared remarks, a lot of these larger financial institutions are realizing that they can't keep pace with technology providers like us and the expense around having people that do the development and the engineering becomes too much for them. So I think this is the beginning of more opportunities up market. Obviously we signed another 20 billion dollar bank for the full suite. There's a lot of expansion opportunities within that as far as the go live at the end of the year.

Matt Flake: There's a chance for the fourth quarter, but we've got to get a little further along in the project. These guys take a little more time than others, but really proud of the team. It'll contribute to 25, obviously, but really proud of the team and the work that we've done. And I'm really excited about working with this financial institution. All right, great color and great win.

David Mehok: David, just to follow for you, on the raised free cash flow outlook, can you tell bridge kind of what's driving that better EBITDA conversion? And then in terms of, is that a right, the good place to start in terms of thinking about free cash flow conversion going forward? Yeah, Alex, you know, obviously, this has been a focus area of ours.

David Mehok: And last year was a pivot point for us, we generated about $6.00 million of free cash flow in 2022. This year, our working capital management has been outstanding across the board, both with our payables and receivables. And our cap, we're a capex like business, you know that. And we've managed our capex very judiciously throughout the year. And again, we think this is 60%. Should we be favorably favorably internally? And we're going to continue to drive that forward into 2024.

David Mehok: All right, great.

David Mehok: Thank you.

Matt Flake: And your next question comes from the line of Matt then's life with BTIG. Your line is open. Yeah, good afternoon. Thanks for taking the question. You mentioned that innovation studio was certainly key to most of not all the wins in the quarter. But curious, from here forward, now that you have a lot more customers using it, a number of partners also contributing, you know, is it something that is sort of a meaningful revenue driver in and of itself?

Matt Flake: Or is this just another key key component of the platform to sort of upsell across self throughout your customer to get more total users and more total usage of the platform? Yeah. Hey, Matt, the shawnton. It is both. I mean, we're clearly seeing it impact our net new wins and obviously with existing customers, it allows us the opportunity to engage more deeply with them and add these solutions. But the revenue impact is starting to grow, you know, obviously a couple of years ago when we went GA with this, we were starting from zero and now we're starting to see more and more dollars flowing from the economic relationship that we strike with these partners as the banks and their end users sign up for it.

Matt Flake: So it will be a more meaningful revenue contributor over time, but the strategic value of that obviously goes well beyond the revenue contribution. And I think it's worth mentioning too that the revenue we generate from this model is different than historical partnerships, which, you know, in this model, it's all net revenue. So the margin profile of these incremental dollars is pretty attractive. So it'll take some time for this to be, you know, very material from a revenue standpoint, but we're starting to see as I mentioned, and the script that this flywheel is starting to turn and we're excited about not only the strategic value of it, but the revenue implications down the road.

Matt Flake: Very helpful. And then when you look at these very largest customers that you've signed both this quarter and in recent quarters, as you go into add your functionality, are you truly sort of ripping and replacing all of their homegrown functionality, or some of these just sort of sitting out in front, being additive, adding those next-gen capabilities, but not necessarily going in and doing the most basic sort of blocking and tackling there.

Matt Flake: So just curious on how big the footprint is and how much, you know, sort of future upsell cross sell comes along side of those. Yeah, Matthew, as I've talked about on the larger the bank, you get the more they make a decision on the product for the business line. So commercial makes a decision on a commercial product, retail makes a decision on a retail product. It's usually a full rip and replace because you can't confuse your customers with multiple systems.

Matt Flake: And the expansion opportunity is tremendous if you execute on the delivery and provide the service that you think we set the bar to provide. So I think the larger the deals are, you have to look at them as one win, and then there's a potential two to three more expansion wins, whether it's relationship pricing, retail, small business, those are all greater opportunities for us. But it also is a testament to we are winning in the best in class to feature functionality to win these deals because you're not going to move your commercial customers to a subpar product.

Matt Flake: So all of those things are big tailwinds for us. As I said in the prepared remarks, the durability of this business, you get through 24 and 25. It just sets up really nicely for us with these opportunities that are out there and we're competing favorably, especially on the commercial side of the business right now. Great. Thank you. Thanks, Matthew.

Terry Tillman: And your next question comes from the line of Terry Tillman with truest securities. Your line is open. Great. Thanks so much for taking the questions. This is Bobbie Deon for Terry. First one's fun renewals. Not sure how much there was in three cube. But can you talk about renewals and how they're looking in terms of expanded products? Are they increasing usage, pairing back, et cetera? And then I'd one follow up. Thank you.

Terry Tillman: Well, from a cross sell perspective, we had a 20 plus percent left year over year from the quarter, the third quarter last year. You're beginning to see, you know, we had a we had a big client conference in May, which always results in the excitement around the new products and the offerings that we're having it also extends contracts as well. I think you're going to see the fourth quarter is historically a really large renewal quarter for us and with renewals, you typically get more cross sell.

Terry Tillman: So I think that the renewal numbers this year, I'm really happy with the customer success team and what they've been doing as well as the delivery and availability teams because customers want to renew with us. They don't want to switch. So I think you're going to see a solid renewal numbers this year for us in the fourth quarter. Obviously, there's a lot to get done. A lot of those contracts come up.

Terry Tillman: We're heads down on those. So renewals are looking very good for 23. I've foreshadowing. I think 24 is going to be solid as well. And then the cross sell that goes with it should be it should be a rather large quarter for us on the cross sell side with those, and all sorts of different rules. Very helpful. Thank you.

Matt Flake: And then any change in the last 90 days associated with length of sales cycles, close rates on large deals, expansion sales, etc. Thank you. So I feel really good about the win rate. Thank you.

Parker Lane: And your next question comes from the line of Parker Lane with Seifull. Your line is open. Yeah, guys, thanks for taking the question here. Matt wanted to ask you a little bit about Fabric here. He's pretty interesting out of the box. Curious in particular to hear who you're targeting with this solution. Is this primarily going to be sort of net new customers that you're going after? Is it something that will appeal to your existing base of customers?

Parker Lane: Yeah, I'll have John to answer that question. He's running the business and so he's done the work on this. I'll let him cover that. Yeah, so Parker, when we think about the initial phase of the go to market here, we've received inbound increase in a world where banks and credit unions are really focused on low cost deposit gathering opportunities in a digital only channel. We're seeing a lot of inbound inquiries which is exciting and that could lead to some net new institutions being part of the initial phase of Q2 Fabric launch in the market.

Parker Lane: But candidly, I think that the most near term and exciting opportunity for us is within our base. Those are existing Q2 customers where we have strong relationships, we have the digital banking platform up and running in most of those cases. So that to us is where we're seeing the most opportunity and where we think the early phase of this will come from. Over time, I think it'll be interesting to see the demand environment and how durable it is because we think this environment is here to stay around the orientation around their deposits.

Parker Lane: And so net new can be more prevalent over time. But in the near term, we really are focused primarily on the existing customer base. Understood. Okay. And then on Andy, another interesting announcement there. I know it's very, very early days, not even in full production yet. But how are you going to see or what's the reception bit amongst your customers to some of the plans you've rolled out there from a generative AI standpoint?

Parker Lane: And is it too early to think about monetization or do you have some framework for how you'll look to monetize that? Hey, Parker, it's perfect. Take that. So yeah, it's a little early on the monetization. What we can tell you, though, is that we've had really a warm reception from our customers as we've demoed some of the live code that we've got built for this. We have to remember that this is getting built on and with assets that we've had in production for a long time.

Parker Lane: If we think about Andy inside our relationship pricing tool really and now using that knowledge model with the enhanced generative AI capabilities, coupling it with the substantial amount of data that we have. These are solutions that are bank-ready, they're bank-tested, they provide all security, compliance, and answer the bell. A lot of the items, frankly, that present and by, and mentioned in his executive order yesterday. So we feel good about our position in that way.

Parker Lane: We've demoed this for a large group of bankers that were here with us in Austin last week, about 125, got a very positive reception from that, that we were addressing real and practical problems that are a drag on their business today. And a good example of that is how do we make their commercial bankers, even more productive by reducing the amount of administrative tasks that they have to do, you know, 40 to 60 percent of a commercial bankers day has been kind of repetitive administrative things.

Parker Lane: So that's a starting point for us. And I could tell you in the room that they had a lot of different ideas of where that could go. So first things first, we got to stay focused on this first kind of beta phase. We've got a number of customers signed up for that and we'll keep you guys abreast of what we're up to as we get into first quarter, 24. That's good. Appreciate the feedback here. And as a reminder, if you would like to ask a question, please press the star then the number one on your telephone keypad.

Matt Flake: Your next question comes from the line of Matthew Roswell with RBC. Your line is open. Yes, can either you met Roswell on for Dan Perlin.

Matt Flake: Congratulations on a nice quarter. Have a couple of questions. First, if we could get into the traffic transaction revenue a little bit, obviously there's pressure from macro environment. Do you mind kind of talking about the bill pay sort of pressure there and whether there's still pressure on the transactions associated with the Helix clients? Yes, sure, Matt. So, we began talking about some of the pressures we were seeing a little bit over a year ago.

Matt Flake: And it's continued and we believe a lot of this is secondally driven. What we've seen is volume slowed down fairly significantly across the board. We were anticipating as we enter 2022 that we would see sort of mid single digit growth and it actually contract slightly and we've seen that trend continue throughout 2023. And a lot of that is consolidation of spend. It's using third parties and FinTechs to pay bills essentially outside of traditional bill pay.

Matt Flake: So again, these are some of the macro drivers that we're seeing that are pressuring it. And on the Helix side of things, there's been obviously a broader impact to FinTechs writ large. And we've obviously felt that in our Helix business. We do have a very high concentration of large FinTechs which are financially stable. They're doing great with us. We've got great business there. But we have seen the overall transactions from them coming down.

Matt Flake: And that's been reflected in both the transactional. And then we do have a pass through business that's also incorporated in our other in the services and other categories. So those are the two areas where you'll see that pressure on the Helix business.

Matt Flake: Okay.

Matt Flake: And on the nice revenue mix shift with the subscription revenue coming up. Is that a mix of the products or banks being more willing to take our subscription deal as opposed to a license deal? Or are you all just actively pushing banks in that direction? No, I mean subscription is really the core solution for us. I mean, that is our platform solution. It's recurring in nature. These deals are typically about five and a half years.

Matt Flake: And the basis of those deals is typically going to be the subscription itself. So this is the highest margin business that we have of those three. And it's obviously by a wide margin. And the mix up that we've seen there is a combination of all the strength that we've seen in that platform business, that core digital banking which we've been talking about, combined with some of the pressures that we've seen in those two other revenue categories. So, you know, those two combined are resulting in the mix-up, and again, it gives us better visibility into the business and obviously mixes up to higher profit.

David Mehok: Okay, and my final question is that the cash conversion has come up nicely as we talked about. Where do you see yourselves deploying that free cash flow going forward from here? Yeah, you know, there's various options for us in terms of capital allocation and something that we focus on very acutely. And consistently, that is, and you know, we're looking out obviously not just the next year, but over the next three years, we do have debt that we're servicing and that comes due in 2025 and 2026, and obviously if the market allows, there may be other opportunities down the road, I would say that that wouldn't be something that we would be considering for a while, but as we sit here today, you know, that is cash that we're going to be using to deploy back into the business in some instances and also continue to work on our debt.

David Mehok: And as you look out to 25 and 26, we said this publicly before, we feel we have the ability to service that debt and retire with the cash on our balance sheet combined with the cash that we're going to generate.

David Mehok: Excellent.

David Mehok: Thank you very much.

David Mehok: Thanks, Barry.

Andrew Smith: And your next question comes from the line of Andrew Smith with City Global Markets. Your line is open. Hey guys, thanks for taking my question.

Matt Flake: And I helped on late, so I apologize if this my questions have been answered, but I wonder if it's wanting to dig into the cross sell motion a little bit. Talk about just the opportunities to go back in the existing base. Obviously, you know, this is something you guys are doing for some time, but I'm just curious, you know, given the expansion of the products and et cetera, the opportunity that remains from a cross sell perspective.

Matt Flake: Thanks a lot, guys. Yeah, thanks Andrew. And I think one of the multiple levers to it, if you think about the 80 customers that we have on digital banking above 5 billion assets, many of those are only using commercial or retail. And they may not be using the full suite where they may be using just small business. And so there's a lot of opportunity to go cross sell another tier one deal essentially in there.

Matt Flake: And then the other thing is is the road map and the innovation that we have put out, we talked about AI, we talked about fabric, but the top cross sell products for us are security solutions, our centric solutions, our other AI driven solutions account opening innovation studios. So we've driven a lot, we've got a lot of products that we can go cross sell, even if you're running retail small business and corporate banking with us.

Matt Flake: So it's the opportunity for us is really about the customer success team is going and establishing a strategic posture with our customers figuring out where they want to go. We have a solution for almost anything, whether it's getting deposited, solving loan problems, pricing, relationships, securing their data, all those things are solutions that we have. And so for us, I think you're going to see that you went on earlier, you're going to see a really strong fourth quarter of cross selling renewals.

Matt Flake: And also those are getting tacked on to the new to the new deals as well. So ASPs are up till 35% I think over year over year. So all of that adds to the cross sell, but also it's profitable business for us and it's sticky and it's differentiated. And so I feel really good about where we are from a product perspective, the maturity of our products, the experience that customers have when they have them in our ability to deliver and support them at a world class.

Matt Flake: Super helpful, thanks Matt.

Matt Flake: And then maybe that actually segues, we'll come to my next question which is on product philosophy. We had a conversation about, you know, the text, it was really good conversation, but the text back a couple months ago, and the things you're doing there. But to what extent does that influence product philosophy being able to roll out new products at a faster pace? Just to ask because obviously I think it just seems externally, like the product philosophy has picked up a little bit.

Matt Flake: Maybe it's business usual, but I'd love to get your perspective, it's just product pipeline philosophy, things like that. Thanks a lot. Yeah, I mean, we try to marry, you know, there's really three levers to product. There's the what's going on in the world, which is, which is on the cutting edge, whether it's AI or things happening that are innovative, it could have been, it could be, you know, you know, user experience, those types of things.

Matt Flake: And then there's the things that like Bank of America Wells Chase offer, those are the feature functions that you kind of have to add. And then there's the operating efficiency of the business that the customer has and we try to marry those and figure out what the priorities are. You know Kirk mentioned we had 125 customers in a couple of weeks ago here in Austin, plus we had our client conference with a thousand people where they share the problems are trying to solve.

Matt Flake: You know, we try to fall in love with the problems and build solutions with our customers to solve those problems. So philosophically delivering technology faster is critical. If you look at innovation studio, there's nobody that delivers a third party product into an environment as quickly as we do. We have, you know, 1400 outside developers outside of Q2 that are developing on our platform and integrating it. And then we have 150, I think at least partners that are participating in the system.

Matt Flake: So we could just we continue to see our ability to be open and listen to our customers and solve problems with them collectively with them is a differentiator for us. And we're going to continue to do that.

Matt Flake: Got it. Thank you very much, Matt. Thanks, Andrew.

Operator: And there are no further questions at this time.

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