Q4 2023 Q2 Holdings Inc Earnings Call

Operator: The Ultimate Parody Site! Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings fourth quarter and full year 2023 financial results conference call. All lines have been placed on mute to prevent any background noise.

Good afternoon, My name is Sarah and I will be your conference operator today.

Sarah: At this time I would like to welcome everyone to the Q2 holdings fourth quarter and full year 2023 financial results conference call.

Sarah: All lines have been placed on mute to prevent any background noise.

Operator: After the speaker's remarks, there will be a question and answer session, and if you have a question during this time, please press star one. I would now like to turn the call over to Josh Yankovich, Investor Relations. Sir, you may begin.

Sarah: After the Speakers' remarks, there will be a question and answer session and if you have a question. During this time Please press star one.

Sarah: I would now like to turn the call over to Josh Yankovich Investor Relations, Sir you may begin.

Josh Yankovich: Thank you, Operator. Good afternoon, everyone. And thank you for joining us for our fourth quarter and full year 2023 conference call. With me on the call today are Matt Flake, our CEO; David Mehawk, our CFO; Jonathan Price, our Executive Vice President of Strategy and Emerging Businesses; and Kurt Coleman, our President, who will join us for the Q&A portion of the call. This call contains forward-looking statements that are subject to significant risks and uncertainties, including, among other things, 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 give no assurance that such expectations or any of our forward-looking statements will prove to be correct.

Josh Yankovich: Thank you operator, good afternoon, everyone and thank you for joining us for our fourth quarter and full year 2023 conference call with me on the call today from Matt Flake, our CEO, David <unk>, our CFO, Jonathan Pryce, 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.

Josh Yankovich: This call contains forward looking statements that are subject to significant risks and uncertainties, including among other things with respect to our expectation the future operating and financial performance of Q2 holdings for the financial services industry.

Josh Yankovich: 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.

Josh Yankovich: Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our periodic reports filed with the SEC, copies of which may be found on the Investor Relations section of our website, including our annual report on Form 10-K for the full year 2023 and subsequent filings, and the press release distributed this afternoon regarding the financial results we will discuss today. Forward-looking statements that we make on the 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 that the company will undertake no obligation to update any such forward-looking statements discussed in this call. Also, unless otherwise stated, all financial measures discussed on this call will be on a non-GAAP basis.

Josh Yankovich: Factors that could cause actual results to differ materially from those reflected in the forward. Looking statements are included in our periodic reports filed with the SEC copies of which may be found on the Investor Relations section of our website, including our annual report on Form 10-K for the full year 2023, and subsequent filings and the press release distributed this afternoon regarding the financial results, we will discuss today.

Josh Yankovich: Forward looking statements that we make on the call are based on assumptions only as of the date discussed investors should not assume that these statements will remain operative at a later time and we undertake no obligation to update any such forward looking statements discussed in this call.

Josh Yankovich: Unless otherwise stated all financial measures discussed on this call will be on a non-GAAP basis, a discussion of why we use non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which may be found on the Investor Relations section of our website and in our form 8-K filed today with the SEC.

Josh Yankovich: A discussion of why we use non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which may be found on the Investor Relations section of our website and in our Form 8K file today. We have also published additional materials related to today's results in our investor relations section. I now turn the call over to...

Josh Yankovich: We are also publish additional materials related to today's results on our Investor Relations website, Let me now turn the call over to Matt.

Matthew P. Flake: Thanks Josh. I'll start today's call by sharing our fourth quarter and full year results and highlights from across the business. I'll then hand the call over to Jonathan to discuss our strategy and provide updates on our emerging business. David will then discuss our financial results, provide guidance for the first quarter and full year, and provide updated financial targets for the next three years. In the fourth quarter, we continued to execute at the high end of our financial expectations, generating non-GAAP revenue of $162.2 million, up 11% year-over-year and 5% sequentially. We also generated adjusted EBITDA of $23.2 million, representing 14.3% of non-GAAP revenue, an improvement of more than 850 basis points of adjusted EBITDA margin over the prior year quarter. We closed out 2023 with outstanding sales execution in the fourth quarter, demonstrated by a record total bookings performance that was over 75% higher than our previous all-time high for a single quarter.

Matthew P. Flake: Thanks, Josh I'll start today's call by sharing our fourth quarter and full year results and highlights from across the business I will then hand, the call over to Jonathan to discuss our strategy and provide updates on our emerging businesses. David will then discuss our financial results share guidance for the first quarter and full year and provide an updated financial targets for the next three years.

Matthew P. Flake: In the fourth quarter, we continued to execute at the high end of our financial expectations generating non-GAAP revenue of $162 $2 million up 11% year over year and 5% sequentially. We also generated adjusted EBITDA of $23 $2 million.

Matthew P. Flake: Representing 14, 3% of non-GAAP revenue, an improvement of more than 850 basis points of adjusted EBIT margin over the prior year quarter.

Matthew P. Flake: We closed out 2023 with outstanding sales execution in the fourth quarter demonstrated by a record total bookings performance that was over 75% higher than our previous all time high for a single quarter.

Matthew P. Flake: sequentially, we added a record $269 million in total backlog and approximately $47 million in subscription annualized recurring revenue, or Subscription ARR, and we signed our two largest deals in company history. The largest deal was a digital banking platform win with a top 10 credit union. This was a retail opportunity, and to win a deal of this magnitude in the credit union space highlights the strength and differentiation of our retail solution. The second largest deal in company history was a net new relationship pricing win with a top four U.S. bank.

Matthew P. Flake: Sequentially, we added a record $269 million in total backlog and approximately $47 million in subscription annualized recurring revenue or subscription.

Matthew P. Flake: And we signed our two largest deals in company history.

Matthew P. Flake: The largest deal was a digital banking platform win with a top 10 credit Union.

Matthew P. Flake: This was a retail opportunity and to win a deal of this magnitude in the credit Union space highlights the strength and differentiation of our retail solutions the.

Matthew P. Flake: The second largest deal in company history was a net new relationship pricing win with a top four U S Bank.

Matthew P. Flake: With the addition of this customer, 7 of the top 15 North American banks now utilize our relationship pricing solution. In addition to these record deals, our sales success from the quarter was broad, covering a strong mix of net new and expansion deals with financial institutions of all sizes across our target segments. The fourth quarter sales performance concluded the most impressive sales year in company history, and I'd like to take a few minutes to recap the full year. And looking back at 2023, the macroeconomic environment ultimately created a tailwind for our sales efforts. Financial institutions rapidly shifted their focus to attracting and growing deposits, which we believe contributed to one of the strongest demand environments we've seen in 20 years.

Matthew P. Flake: With the addition of this customer seven of the top 15, North American banks now utilize our relationship pricing solutions and.

In addition to these record deals our sales success from the quarter was broad covering a strong mix of net new and expansion deals with financial institutions of all sizes across our target segments.

Matthew P. Flake: The fourth quarter sales performance concluded the most impressive sales year in company history, and I'd like to take a few minutes to recap the full year and looking back at 2023, the macroeconomic environment ultimately created a tailwind for our sales efforts financial institutions rapidly shifted their focus to attracting and growing deposits, which we believe.

Matthew P. Flake: Tribute to one of the strongest demand environments, we've seen in 20 years.

Matthew P. Flake: And the strength of our product portfolio puts us in an advantageous position to capitalize on these market dynamics.

Matthew P. Flake: We believe we're the only digital banking provider with best in class retail small business and commercial solutions on a single platform has proven to help financial institutions grow deposits. Our sales teams executed on the strong demand and product market fit making 2023, our biggest bookings year ever not only in terms of net new deals, but also in cross.

Matthew P. Flake: And the strength of our product portfolio puts us in an advantageous position to capitalize on these market dynamics. We believe we're the only digital banking provider with best-in-class retail, small business, and commercial solutions on a single platform that's proven to help financial institutions grow deposits. Our sales teams executed on the strong demand and product market, making 2023 our biggest bookings year ever, not only in terms of net new deals but also in cross sales and renewal. We signed 17 total tier one and enterprise deals, with four of them among our top ten deals of all time in terms of contracted ARR. We had a number of marquee relationship pricing wins, particularly with Tier 1 and enterprise institutions. And in addition to our success upmarket, we won retail, small business, and commercial digital banking deals across Tier 2 and 3 segments as well, which have long been the bread and butter of our digital banking business.

Matthew P. Flake: Sales and renewal.

Matthew P. Flake: We signed 17 total tier one enterprise deals in the year with four of them among our top 10 deals of all time in terms of contracted IRR we.

Matthew P. Flake: We had a number of marquee relationship pricing wins, particularly with tier one and enterprise institutions and in addition to our success upmarket, we won retail small business and commercial digital banking deals across tier two and three segments as well.

Matthew P. Flake: Which have long been the bread and butter of our digital banking business.

Matthew P. Flake: On the product innovation front, one of the biggest themes in our industry and in our customer conversations in 2023 was the discussion around new AI advancements and how they might impact financial services, we've been using machine learning in our products for almost 15 years, helping our customers drive better fraud prevention marketing and operational efficiency.

Matthew P. Flake: On the product innovation front, one of the biggest themes in our industry and in our customer conversations in 2023 was the discussion around new AI advances and how they might impact financial services. We've been using machine learning in our products for almost 15 years, helping our customers drive better fraud prevention, marketing, and operational efficiency. Going forward, we intend to keep AI as a core tenet of our innovation strategy, whether by developing and partnering around new AI-powered products or using AI to enhance our existing product portfolio. In addition, we already have internal use cases for our employees leveraging AI, which has the potential to further enhance our operational efficiency.

Matthew P. Flake: Going forward, we intend to keep AI as a core tenant of our innovation strategy, whether by developing and partnering around new AI powered products, we're using AI to enhance our existing product portfolio in.

Matthew P. Flake: In addition, we already have internal use cases for our employees leveraging AI, which has the potential to further enhance our operational efficiency.

Matthew P. Flake: We believe that financial institutions are going to expect their vendors to have a comprehensive and compliant approach to AI and that with our deep domain expertise, we're positioned to lead the way in delivering innovative solutions that anticipate the evolving demands of the industry and help our customers be more efficient and effective.

Matthew P. Flake: Last but not least 2023 was a year in which we made considerable progress on improved profitability.

Matthew P. Flake: We believe that financial institutions are going to expect their vendors to have a comprehensive and compliant approach to AI and that, with our deep domain expertise, we're positioned to lead the way in delivering innovative solutions that anticipate the evolving demands of the industry and help our customers be more efficient and effective. Last but not least, 2023 was a year in which we made considerable progress on improved profitability. By increasing our focus on higher-margin subscription revenue opportunities and continuing to execute on cost efficiencies across the business, we drove nearly 600 basis points of adjusted EBITDA improvement for the full year while delivering an exceptional customer experience. Continued product innovation and maintaining an award-winning culture.

Matthew P. Flake: By increasing our focus on higher margin subscription revenue opportunities and continuing to execute on cost efficiencies across the business.

Matthew P. Flake: We drove nearly 600 basis points of adjusted EBITDA improved improvement for the full year, while delivering an exceptional customer experience continued product innovation and maintaining an award winning culture.

Matthew P. Flake: This record sales performance, our broad and differentiated product portfolio as well as the rapid progress on our profitable growth initiatives all demonstrate the strength of our business model and give me confidence in our trajectory looking ahead to 2024 and beyond.

Matthew P. Flake: With that I'll hand, it over to Jonathan to discuss our strategy and updates on our emerging businesses.

Jonathan Pryce: Thanks, Pat I'll start with Q2 innovation, Tsuneo, which had a breakout year in 2023 in terms of driving sales success for the company.

Jonathan Pryce: It was cited as a key reason for choosing Q2 and more than 90% of net new digital banking deals in a year.

Matthew P. Flake: This record sales performance, our broad and differentiated product portfolio, as well as the rapid progress on our profitable growth initiatives, all demonstrate the strength of our business model and give me confidence in our trajectory looking ahead to 2024 and beyond. With that, I'll hand it over to Jonathan to discuss our strategy and updates on our emerging business. Thanks, Matt.

Jonathan Pryce: And today, approximately 80% of our digital banking platform customers are participating any innovation studio ecosystem.

Jonathan Pryce: Now the Q2 innovation studio has such a strong roster of partners and customer utilization is beginning to drive an increasing financial impact for our customers. In fact, a number of our customers have told us they have been able to offset the annual cost of their digital banking contract by more than 50% through the revenue.

Jonathan Price: I'll start with Q2 Innovation Studio, which had a breakout year in 2023 in terms of driving sales success for the company. It was cited as a key reason for choosing Q2 in more than 90% of net new digital banking deals during the year. And today, approximately 80% of our digital banking platform customers are participating in the Innovation Studio.

Jonathan Pryce: And cost savings Pedro with our innovation studio solutions in 2023.

Jonathan Pryce: Our only in the early innings of seeing this flywheel effect and we're excited about Q2 innovation studios ability to continue differentiating us in the competitive landscape and drive even more strategic and economic value for our customers and Q2 over the long term.

Jonathan Pryce: On the helix front, we had a number of key wins and developments in 2023.

Jonathan Pryce: In spite of a more challenging fintech backdrop than in prior years, we added new customers extended some of our biggest existing customers and launch new programs and products.

Jonathan Price: Now that Q2 Innovation Studio has such a strong roster of partners and customer utilization, it's beginning to drive an increasing financial impact for our customers. In fact, a number of our customers have told us they have been able to offset the annual cost of their digital banking contract by more than 50% through the revenue and cost savings they drive with their Innovation Studio solutions in 2020. We're only in the early innings of seeing this flywheel effect, and we're excited about Q2 Innovation Studios' ability to continue differentiating us in the competitive landscape and drive even more strategic and economic value for our customers and Q2 over the long term. On the Helix front, we had a number of key wins and developments in 2022.

Jonathan Pryce: And ended the year strong with a couple of wins in the fourth quarter.

Jonathan Pryce: We also began to expand our go to market focus to deliver helix to financial institutions in late 2023.

Jonathan Pryce: <unk> is a cost effective cloud based core for deposit accounts.

Jonathan Pryce: Given the macroeconomic backdrop, we've seen an increase in demand for this technology from financial institutions and believe there are several exciting use cases for financial institutions to use us to bolster their deposit gathering strategies, such as launching a direct bank with Q2 fabric, which we announced last quarter.

Jonathan Pryce: We believe taking <unk> to market with financial institutions is a natural evolution of our strategy and we're excited to bring it closer to our digital banking customer base in the quarters ahead.

Jonathan Pryce: And whether it's by helping financial institutions drive more efficient and profitable deposit growth by a helix or the tangible economic and strategic value. We are delivering through Q2 innovation studio.

Jonathan Price: In spite of a more challenging fintech backdrop than in prior years, we added new customers, extended some of our biggest existing customers, and launched new programs and products, and ended the year strong with a couple of wins in the fourth quarter. We also began to expand our go-to-market focus to deliver Hewix to financial institutions in late 2023. It looks at the cost-effective cloud-based core for deposit accounts.

Jonathan Pryce: We believe we'll look back on 2023 at the year in which our emerging businesses began to transform the relationship we have with our customers.

Jonathan Pryce: A true ecosystem in which they're able to use our products for a wider range of their business needs as well as improving their ROI by generating revenue and cost savings.

Jonathan Pryce: With that I'll hand, the call over to David to discuss our financial results.

David: Thanks, Jonathan the fourth quarter concluded a year that delivered record financial performance across many key metrics with significantly improved margins cash flow and a stronger balance sheet.

Jonathan Price: Given the macroeconomic backdrop, we've seen an increase in demand for this technology from financial institutions and believe there are several exciting use cases for financial institutions to use Helix to bolster their deposit gathering strategy, such as launching a direct bank with Q2 Fabric, which we announced last quarter. We believe taking Helix to market with financial institutions is a natural evolution of our strategy, and we're excited to bring it closer to our digital banking customer base in the quarters ahead, whether it's by helping financial institutions drive more efficient and profitable deposit growth via Helix. For the tangible economic and strategic value we're delivering through Q2 Innovation Studio, we believe we'll look back on 2023 as the year in which our emerging businesses began to transform the relationship we have with our customers. We are creating a true ecosystem in which they are able to use our products for a wider range of their business needs as well as improve their ROI by generating revenue and cost savings. With that, I'll hand the call over to David to discuss our financial results. Thanks, Jonathan.

David: For the full year of 2023, adjusted EBITDA more than doubled from the prior year and full year free cash flow improved by over $30 million, resulting in an end of year cash balance of over $324 million.

David: In the fourth quarter, we delivered strong financial results with adjusted EBITDA at the high end of our guidance as well as our best ever bookings performance, which drove record growth of subscription.

David: And backlog.

David: I will now discuss our financial results in more detail and conclude with our guidance for 2024 as well as updated three year financial targets.

David: non-GAAP revenue for the fourth quarter was $162 2 million, an increase of 11% year over year and up 5% sequentially.

David: Total non-GAAP revenue for the full year was $625 million.

David: Up 10% from the prior year.

David: The year over year and sequential increases for the quarter were primarily driven by an increase in subscription revenue associated with cross sold solutions and digital banking go lives, which occurred during the quarter.

David E. Hynes: The fourth quarter concluded a year that delivered record financial performance across many key metrics, with significantly improved margins, cash flow, and a stronger balance sheet. For the full year of 2023, adjusted EBITDA more than doubled from the prior year, and full year free cash flow improved by over $30 million, resulting in an end-of-year cash balance of over $324 million. In the fourth quarter, we delivered strong financial results, with adjusted EBITDA at the high end of our guidance, as well as our best-ever business performance, which drove record growth of subscription ARR and backlog. I will now discuss our financial results in more detail and conclude with our guidance for 2024, as well as updated three-year financial targets. Non-GAAP revenue for the fourth quarter was $162.2 million, an increase of 11% year-over-year and up 5% sequentially. Total non-GAAP revenue for the full year was $625 million, up 10% from the prior year.

David: The year over year growth also benefited from the effects of the previously disclosed mutual termination of an off by customer contract in the fourth quarter of 2022, which negatively impacted our 2022 results and contributed 230 and the 320 basis.

David: Points, respectively to our Q4, 2023% total revenue and subscription revenue growth rates.

David: Our subscription revenue growth for the full year was 16%.

David: And was a record high 78% of our total revenue.

David: Based on the strength in subscription based bookings we observed during the year. We continue to expect our subscription revenue will make up an increasing mix of our overall revenue in 2024.

David: As expected our services and transactional revenue categories, both declined year over year in the fourth quarter driven by continued pressure associated with some of our professional services engagements, which are more discretionary in nature as well as lower pass through revenue from our helix business.

David: Both of which have been impacted by macroeconomic factors.

David E. Hynes: The year-over-year and sequential increases for the quarter were primarily driven by an increase in subscription revenue associated with cross-sold solutions and digital banking go-lives which occurred during the quarter. The year-over-year growth also benefited from the effect of the previously disclosed mutual termination of an Alt-Fi customer contract in the fourth quarter of 2022, which negatively impacted our 2022 results and contributed 230 and 320 basis points, respectively, to our Q4 2023 total revenue and subscription revenue growth rate. Our subscription revenue growth for the full year was 16% and was a record high 78% of our total revenue. Based on the strength of subscription-based bookings we observed during the year, we continue to expect our subscription revenue will make up an increasing share of our overall revenue in 2024.

David: In aggregate, our non subscription based revenues for the fourth quarter declined by 6% year over year and represented 22% of total company revenue down from 26% in the prior year period.

David: As we've discussed previously as part of our profitable growth strategy, we're directing investments towards our most profitable subscription revenue streams and given the industry and macroeconomic drivers. We've discussed we expect the trajectory that we've experienced in our lower margin transactional and services revenue streams to continue.

David: Total annualized recurring revenue or total IRR grew to $734 $8 million up 12% year over year from $655 $2 million at the end of 2022.

David: Our subscription <unk>.

David: Grew to $593 9 million up 19% year over year from $509 million at the end of 2022.

David E. Hynes: As expected, our services and transactional revenue categories both declined year over year in the fourth quarter, driven by continued pressure associated with some of our professional services engagements, which are more discretionary in nature, as well as lower pass-through revenue from our Helix business, both of which have been impacted by macroeconomic factors. In aggregate, our non-subscription-based revenues for the fourth quarter declined by 6% year-over-year and represented 22% of total company revenue, down from 26% in the prior year period.

David: Our <unk> growth for the year was driven primarily by our strong bookings performance with total IRR growth being partially impacted by a decline in transactional as well as services and other revenue.

Our ending backlog of approximately $1 8 billion.

David: <unk> had record increases of $269 million sequentially, or 17% and $343 million year over year or 23%.

David: The year over year and sequential increases were driven by the strength of net new cross sale and renewal bookings during the quarter.

David E. Hynes: As we've discussed previously, as part of our profitable growth strategy, we're directing investments toward our most profitable subscription revenue streams. And given the industry and macroeconomic drivers we've discussed, we expect the trajectory that we've experienced in our lower-margin transactional and services revenue streams to continue. Total annualized recurring revenue, or total ARR, grew to $734.8 million, up 12% year-over-year. $655.2 million at the end of 2022.

David: While we typically expect an increase in our fourth quarter backlog based on the seasonality of renewals the magnitude of both the sequential and year over year increase clearly exhibit the exceptionally strong bookings performance.

David: Our trailing 12 month total net revenue retention rate for 2023 was 108%.

David: Down from a 110% in 2022.

David: The annual decline reflected the continued strength observed in subscription based revenue derived from our existing customers offset by the expected decline in discretionary services based revenue with some of our existing customers.

David E. Hynes: Our subscription ARR grew to $593.9 million, up 19% year-over-year from $500.9 million at the end of 2022. Our ARR growth for the year was driven primarily by our strong bookings performance, with total ARR growth being partially impacted by a decline in transactional as well as services and other revenue. Our ending backlog of approximately $1.8 billion had record increases of $269 million sequentially, or 17%, and $343 million year-over-year, or 23%. The year-over-year and sequential increases were driven by the strength of net new, cross-sale, and renewal bookings during the quarter. While we typically expect an increase in our fourth quarter backlog based on the seasonality of renewals, the magnitude of both the sequential and year-over-year increase clearly reflects the exceptionally strong bookings performance. Our trailing 12-month total net revenue retention rate for 2023 was 108%, down from 110% in 2022.

David: Our revenue churn for 2023 was six 1% improving from six 3% in 2022, we believe we will see a continued reduction in our churn rates in 2024 with digital banking churn well below 5% based on the renewal strength in 2023, coupled with.

David: Continued high customer satisfaction.

David: Gross margins were 56% for the fourth quarter.

David: Up from 51, 5% in the prior year period, and 53, 9% in the previous quarter.

David: Both the year over year and sequential increases were driven largely by a favorable increase in higher margin revenue mix and cost efficiencies, which resulted in cost of sales being roughly flat in terms of total spend.

David: The year over year increase in gross margin also benefited by approximately 150 basis points related to the impact of the previously discussed contract termination in the fourth quarter of 2022.

David: Gross margins were 54, 5% for the full year up from 51, 6% in the prior year.

David E. Hynes: The annual decline reflected the continued strength observed in subscription-based revenue derived from our existing customers, offset by the expected decline in discretionary services-based revenue with some of our existing customers. Our revenue churn for 2023 was 6.1%, improving from 6.3% in 2022. We believe we will see a continued reduction in our churn rates in 2024, with digital banking churn well below 5% based on the renewal strength in 2023 coupled with continued high customer satisfaction. Gross margins were 56% for the fourth quarter, up from 51.5% in the prior year period and 53.9% in the previous quarter.

David: This expansion of almost 300 basis points was due to a higher mix of incremental subscription revenue as well as efficiencies gained through more effective utilization of our global workforce.

David: Total operating expenses for the fourth quarter were $74 8 million or <unk> 46, 1% of revenue compared to $72 7 million or <unk> 49, 5% of revenue in the fourth quarter of 2022 and $71 million or <unk> 45.

David: 8% of revenue in the third quarter of 2023.

David: The fourth quarter year over year improvement in operating expenses as a percent of revenue was driven primarily by improved scaling of expenses within sales and marketing as we continue to drive improvement in our cost of acquiring new customers and overall sales efficiency.

David E. Hynes: Both the year-over-year and sequential increases were driven largely by a favorable increase in higher-margin revenue mix and cost efficiency, which resulted in cost of sales being roughly flat in terms of total spend. The year-over-year increase in gross margin also benefited by approximately 150 basis points related to the impact of the previously discussed contract termination in the fourth quarter of 2022. Gross margins were 54.5% for the full year, up from 51.6% in the prior year.

David: We ended the year with 2315 total employees.

David: Up from 2249 at the end of 2022 with the majority of additional resources on boarded primarily within our cost of sales and R&D functions.

David: Total adjusted EBITDA was $23 2 million for the fourth quarter and.

David: $76 $9 million for the full year.

David: The full year adjusted EBITDA was more than two times the adjusted EBITDA, we delivered in 2022.

David: With adjusted EBITDA margins up by approximately 580 basis points as we continue to mix to higher margin revenue streams and drive efficiencies throughout the business.

David E. Hynes: This expansion of almost 300 basis points was due to a higher mix of incremental subscription revenue as well as efficiencies gained through more effective utilization of our global workforce. Total operating expenses for the fourth quarter were $74.8 million, or 46.1% of revenues, compared to $72.7 million or 49.5% of revenue in the fourth quarter of 2022 and $71 million or 45.8% of revenue in the third quarter of 2023. The fourth quarter year-over-year improvement in operating expenses as a percent of revenue was driven primarily by improved scaling of expenses within sales and marketing as we continue to drive improvement in our cost of acquiring new customers and overall sales efficiency. We end the year with 2,315 total employees, up from 2,249 at the end of 2022, with the majority of additional resources onboarded primarily within our cost of sales and R&D function. Total adjusted EBITDA was $23.2 million for the fourth quarter and $76.9 million for the full year.

David: We ended the year with cash cash equivalents and investments of $324 million up from $298 million at the end of the third quarter.

David: We generated cash flow from operations in the fourth quarter of $36 $6 million the.

David: The strength in operating cash flow was primarily attributable to strong working capital management and favorable seasonality.

David: We also generated free cash flow of $29 8 million during the quarter.

David: For the full year, we generated cash flow from operations of $73 million and free cash flow of $39 $6 million.

David: Our free cash flow was negatively impacted by over $7 million from a few larger customers delaying invoices into 2024.

David: As a reminder, our first quarter is a seasonally low quarter for cash flow based on our annual bonus payout combined with the end of year Commission payouts.

David: Looking forward, we expect consistent progress on working capital management and scaling of our cash capex to revenue, resulting in free cash flow conversion to adjusted EBITDA of over 60% in 2024 and expanding thereafter.

David E. Hynes: The full-year adjusted EBITDA was more than two times the adjusted EBITDA we delivered in 2022, with adjusted EBITDA margins up by approximately 580 basis points. As we continue to mix to higher-margin revenue streams and drive efficiencies throughout the business. We end the year with cash, cash equivalents, and investments of $324 million, up from $290.8 million at the end of the third quarter. We generated cash flow from operations in the fourth quarter of $36.6 million. The strength in operating cash flow is primarily attributable to strong working capital management and favorable seasonality. We also generated free cash flow of $29.8 million during the quarter. For the full year, we generated cash flow from operations of $70.3 million and free cash flow of $39.6 million.

Speaker Change: Let me wrap up by sharing our first quarter and full year 2020 for guidance.

Speaker Change: We forecast first quarter non-GAAP revenue in the range of $161 $7 million.

Speaker Change: To $164 $7 million in full year non-GAAP revenue in the range of $683 million to $689 million representing year over year growth of 9% to 10%.

Speaker Change: Please note, we do not anticipate any impact to revenue.

Speaker Change: From deferred revenue associated with purchase accounting in 2024 and beyond so our non-GAAP revenue guidance is the same as GAAP revenue for the equivalent period.

Speaker Change: We forecast first quarter, adjusted EBITDA of $22 million to $24 million.

Speaker Change: And full year 2020 for adjusted EBITDA.

Speaker Change: Of $107 million to $111 million, representing approximately 16% of revenue for the year.

Speaker Change: We continue to believe we are well positioned to achieve our rule of 30 target not a total revenue growth basis in the back half of the year.

David E. Hynes: Our free cash flow was negatively impacted by over $7 million from a few larger customers delaying invoices into 2024. As a reminder, our first quarter is a seasonally low quarter for cash flow based on our annual bonus payout combined with the end-of-year commission payout. Looking forward, we expect consistent progress on working capital management and scaling of our cash capex to revenue, resulting in free cash flow conversion to adjusted EBITDA of over 60% in 2024 and expanding thereafter. Let me wrap up by sharing our first quarter and full year 2024 guidance. We forecast first quarter non-GAAP revenue in the range of $161.7 million to $164.7 million.

Speaker Change: In addition to our outlook for the current year were also unveiling our new financial targets. This set of long term targets for the next three years is reflective of our expectations for the continued execution of our profitable growth strategy base.

Speaker Change: Based on the strong bookings performance. We added in 2023. In addition to the pipeline that we have entering the year, we're targeting an average subscription revenue growth rate of approximately 14% for the next three years.

It is important to remember that while some of the larger deals we signed in the most recent quarter carry longer implementation timelines and have minimal benefit to revenue in 2020 for these deals provide us with early visibility into 2025 and beyond.

In addition, we believe that with our continued progress on profitability improvements.

Speaker Change: We will achieve an annual average of 300 to 400 basis points and adjusted EBITDA margin expansion over the next three years.

David E. Hynes: And full-year non-GAAP revenue in the range of $683 million to $689,000,000, representing year-over-year growth of 9 to 10 percent. Please note, we do not anticipate any impact to revenue from Deferred Revenue Associated with Purchase Accounting in 2024 and beyond. Thus, our non-GAAP revenue guidance is the same as GAAP revenue for the equivalent period.

Speaker Change: As we mentioned previously this focus on increased profitability also extends to cash flow generation.

Speaker Change: We expect free cash flow conversion of adjusted EBITDA to increase to over 70% in 2026, and we currently expect to retire our existing convertible debt over the next few years, while maintaining ample cash on our balance sheet to run the business.

David E. Hynes: We forecast first quarter adjusted EBITDA of $22 million to $24 million and full year 2024 adjusted EBITDA of $107 million to $111 million, representing approximately 16% of revenue for the year. We continue to believe we're well positioned to achieve our Rule of 30 target on a total revenue growth basis in the back half of the year. In addition to our Outlook for the current year, we're also unveiling our new financial targets. This set of long-term targets for the next three years is reflective of our expectations for the continued execution of our profitable growth strategy. Based on the strong bookings performance we had in 2023, in addition to the pipeline that we have entering the year, we're targeting an average subscription revenue growth rate of approximately 14% for the next three years.

Speaker Change: Looking back on 2023, it was a pivotal year in our financial journey and we're pleased with the progress we made on our key objectives.

Speaker Change: Remain confident in our ability to continue to drive meaningful improvements in our results going forward.

Speaker Change: As we continue to execute on our profitable growth strategy, we will invest in areas of the business, which we believe will generate the best returns for our customers and our shareholders. While we continue to drive efficiencies and deliver outcomes aligned with our financial targets.

Speaker Change: With that I will turn the call back over to Matt for his closing remarks.

Matthew P. Flake: As we kick off 2020 for my confidence in the future of the business is stronger than ever and 2023, we saw record bookings performance across net new Cros and renewals, resulting in record backlog growth.

Matthew P. Flake: We also built on our legacy of product innovation and excellent customer experience further deepening our competitive differentiation I want to take a moment to thank our customers and employees. Our progress throughout 2023 was a direct result of their commitment and tireless execution.

David E. Hynes: It's important to remember that while some of the larger deals we've signed in the most recent quarter carry longer implementation timelines and have minimal benefit to revenue in 2024, these deals provide us with early visibility into 2025 and beyond. In addition, we believe that with our continued progress on profitability improvements... We will achieve an annual average of 300 to 400 basis points in adjusted EBITDA margin expansion over the next three years. As we mentioned previously, this focus on increased profitability also extends to cash flow generation. We expect free cash flow conversion of adjusted EBITDA to increase to over 70% in 2026. And we currently expect to retire our existing convertible debt over the next few years while maintaining ample cash on our balance sheet to run the business.

Matthew P. Flake: Coming off the last few years of highly complex operating conditions in a rapidly changing macro environment, we're especially pleased with the positive bookings performance and the impact it is having on our business we.

Matthew P. Flake: We expect this will help drive acceleration in subscription revenue growth in 2025, as we implement some of the larger deals we signed in the second half of 2023.

Matthew P. Flake: And if I look at the state of our pipeline and the activity in the marketplace. We expect a strong demand environment to continue as we believe the focus on deposits is here to stay for the foreseeable future.

Matthew P. Flake: Overall, our sales success and associated backlog growth coupled with our improved profitability in 2023 gives me confidence in our ability to execute on the three year financial targets that David just shared.

Speaker Change: I'm excited about what is to come in 2024 and beyond thank you and with that I'll hand, it back to the operator for questions.

Speaker Change: Thank you if you have a question. Please press star one on your telephone keypad. If you queued up for a question and want to withdraw simply press star one again.

David E. Hynes: Looking back on 2023, it was a pivotal year in our financial journey, and we're pleased with the progress we made on our key objectives. We remain confident in our ability to continue to drive meaningful improvements in our results going forward. As we continue to execute on our profitable growth strategy, we will invest in areas of the business that we believe will generate the best returns for our customers and our shareholders while we continue to drive efficiencies and deliver outcomes aligned with our financial targets. With that, I'll turn the call back over to Matt for his closing remarks.

Speaker Change: Your first question comes from the line of Peter Heckmann with D. A Davidson your line is open.

Speaker Change: Okay.

Peter J. Heckmann: Hey, good afternoon, everybody. Thanks for taking the question and good to see the record bookings.

Yes, Thanks, we're really happy with the Pete can.

Peter J. Heckmann: Can you talk a little bit about is there anybody any change in terms of competitive displacement, who you might be displacing in some of these larger deals.

Peter J. Heckmann: Usual suspects or in some cases are these maybe.

Matthew P. Flake: As we kick off 2024, my confidence in the future of the business is stronger than ever. In 2023, we saw record booking performance across net new, cross, and renewals, resulting in record backlog growth. We have also built on our legacy of product innovation and excellent customer experience, further deepening our competitive differentiation. I want to take a moment to thank our customers and employees. Our progress throughout 2023 was a direct result of their commitment and tireless execution.

Peter J. Heckmann: In house systems that may take a little bit longer to to replace.

Peter J. Heckmann: Yes, it's the usual suspects I mean between the legacy providers and then.

Peter J. Heckmann: Mostly up market and then.

Peter J. Heckmann: We competed very well.

Peter J. Heckmann: When rates were.

Peter J. Heckmann: At the levels they are.

Peter J. Heckmann: <unk> always been at in an up market they were probably a little above average but.

Peter J. Heckmann: It's the usual players be.

Speaker Change: Okay, and then on relationship pricing could you remind us.

Speaker Change: If I remember correctly and in many cases that there is no incumbent solution, but how do those ramp and in terms of revenue and how much relation is it to underlying volumes.

Speaker Change: Hey, David Yeah, the way that those typically ramp is it depends upon the complexity and the size of the customer so the larger customers. They can take nine to 12 months for implementation.

Operator: Coming off the last few years of highly complex operating conditions and a rapidly changing macro environment, we're especially pleased with the positive bookings performance and the impact it is having on our business. We expect this will help drive acceleration and subscription revenue growth in 2025 as we implement some of the larger deals we signed in the second half of 2023. And if I look at the state of our pipeline and the activity in the marketplace, we expect a strong demand environment to continue, as we believe the focus on deposits is here to stay for the foreseeable future. Overall, our sales success and associated backlog growth, coupled with our improved profitability in 2023, gives me confidence in our ability to execute on the three-year financial targets that David just shared. I'm excited about what is to come in 2024 and beyond. Thank you, and with that, I'll hand it back to the operator for questions. Thank you. If you have a question, please press star 1 on your telephone keypad. If you have queued up for a question and want to withdraw, simply press star 1 again.

David: The typical customers that we have on those relationship pricing solutions, we can get up in line for us.

David: Obviously, the one that Matt referenced on the call is a larger one so that will take longer to implement.

David: Uh-huh Uh-huh.

Alright, that's helpful I'll get back in the queue. Thanks, Pete Thanks Pete.

David: Your next question comes from the line of Terry Tillman with <unk> Securities. Your line is open.

Terry Tillman: Yeah, Hey, good afternoon, gentlemen, and congratulations from me as well on the bookings and improved cash flow I guess, just a question for you Matt in terms of.

Terry Tillman: It seems like a right place right time here in terms of your focus on deposits commercial and Treasury management.

Terry Tillman: Maybe this is a multiyear product cycle or replacement cycle I should say I mean, I don't want to put words in your mouth, but what's the visibility in terms of the goodness continuing here with the opportunities on commercial deposits and treasury.

Terry Tillman: Have any sense on how many more unit opportunities there are but maybe you could shed some more light on the longevity of this potential.

Terry Tillman: The replacement cycle, and then I had a follow up yes.

Speaker Change: Yes, Terry I mean, it's.

Speaker Change: Like I said I haven't seen a demand environment like this in a long time and I've been doing this since pretty much the beginning of Internet banking.

Peter J. Heckmann: Your first question comes from the line of Pete Heckmann with D.A. Davidson. Your line is open. Hey, good afternoon, everybody.

Speaker Change: The relationship pricing is also very popular I think it shows the power of our products to acquire and retain deposits and I think deposits are at the center of what our customers and prospects are looking for so.

Matthew P. Flake: Thanks for taking the question and good to see the record book. Yeah, thanks. We're really happy with it. Can you talk a little bit about, has there been any change in terms of competitive displacement, who you might be displacing on some of these larger deals, the usual suspects, or in some cases are these... Q2 Holdings Inc., The Bulletproof Executive 2013, Yeah, it's the usual suspects. I mean, between the legacy providers, and then which are mostly upmarket and then, Competed very well. Q2 Holdings Inc. Okay, and then on relationship pricing, can you remind us, I remember correctly, in many cases, that there is no income and solution, but... How do those ramp up in terms of revenue? The Bulletproof Executive 2013, Hey, it's David. Yeah, the way that those typically ramp is it depends upon the complexity and the size.

Speaker Change: The commercial opportunity is obviously tremendous we still have.

Speaker Change: A lot of Greenfield out there to go get new opportunities plus cross sell into existing the largest deal we signed in the quarter was a retail deal, though I don't want I don't want to lose side of the power of our retail platform. We certainly hope we execute.

Speaker Change: And that delivery that there'll be a commercial opportunity down the road for them as well.

Speaker Change: It's not just digital banking, it's not relationship pricing, we were really successful with our fraud products. We were really we had good expansion and relationship pricing.

Speaker Change: <unk> studio is continuing to differentiate for us all.

Speaker Change: All of the tier ones that we signed on the digital banking side had innovation studio included in them. So.

Speaker Change: The momentum is there and you would think after the record performance, we had to close out the year that the pipeline.

David E. Hynes: The larger customers, they can take nine up to 12. Q2 Holdings Inc., The Bulletproof Executive 2013, Obviously, the one that Matt referenced on the call is a large... Alright, that's helpful. I'll get back in the queue.

Speaker Change: We kind of be drained a little bit but.

Speaker Change: The pipeline is healthier than it was last year at this time, you kind of build momentum throughout the year through the seasonality of it but feel really good about the opportunity and where the products are right. Now we just got to go execute on it and I have full faith and confidence in the sales organization and relationship management teams to go do that.

Terry Tillman: Your next question comes from the line of Terry Tillman with Truist Securities. Your line is open. Yeah, hey, good afternoon, gentlemen.

Speaker Change: That's wonderful to hear that I guess, David maybe just a question for you I was pleasantly surprised to get three years worth of financial targets.

Matthew P. Flake: Congratulations for me as well on the bookings and improved cash flow. I guess just a question for you, Matt, in terms of it seems like the right place, the right time here in terms of your focus on deposits, commercial, and treasury management. You know, maybe this is a multi-year product cycle or placement cycle, I should say. I mean, I don't want to put words in your mouth, but what's the visibility in terms of the goodness continuing here with the opportunities for commercial deposits and treasury? I don't have any sense of how many more unit opportunities there are, but maybe you could shed some more light on the longevity of this potential replacement cycle and then add a follow-up. Yeah, Terry, I mean, it's like, like I said, I haven't seen a demand environment like this in a long time. And I've been doing this since pretty much since the beginning of internet banking.

Speaker Change: <unk> I guess, you all been busy here getting into.

Speaker Change: Ahead of this earnings call, but one thing I'm curious about is if my maths right. We're looking at a 22% to 24% EBITDA margin as we look out for years.

David: What I'm curious about is how much of that is gross margin expansion as opposed to any of the three opex items being outsized in terms of where the leverage comes from thank you.

Speaker Change: Yeah. Thanks, Terry is going to be a mix of both.

Speaker Change: I would say youll for your modeling purposes, it would be skewed slightly towards opex scaling so opex scaling driving about 60% of that EBITDA improvement over the course of the three years and gross margin expansion driving about 40%.

Speaker Change: I think you can think about that as you model out each of the next three years.

Speaker Change: Great. Thank you.

Speaker Change: You bet.

Speaker Change: Your next question comes from the line of Alex Scott.

Alex Scott: <unk> with Raymond James Your line is open.

Matthew P. Flake: The relationship pricing is also very popular. I think it shows the power of our products to acquire and retain deposits. And I think deposits are at the center of what our customers and prospects are looking for. So the commercial opportunity is obviously tremendous. We still have a lot of greenfield out there to get new opportunities, plus cross-sell into existing ones. The largest deal we signed in the quarter was a retail deal, though. I don't want to lose sight of the power of our retail platform. We certainly hope so if we execute. The Bollinger Band, LLC.

Alex Scott: Great. Thank you, Matt just wanted to follow up on Ontario's first question just in terms of following up on the great bookings in your commentary on the macro being a little bit longer lasting can you just provide some more color on what youre seeing in terms of like pipeline growth. There RFP activity I know you've commented on the past in terms of growth. We started last year, what do you say.

Alex Scott: Kind of in growth this year.

Alex Scott: In terms of giving you that level of confidence.

Alex Scott: Well, it's a combination of the pipe is larger than it was a year ago in the first quarter and as I've said it builds but I don't have the number on the RFP activity that we're seeing good activity there.

David E. Hynes: Q2 Holdings Inc., That's wonderful to hear, Matt. I guess, David, maybe just a question for you. I was pleasantly surprised to get three years' worth of financial target information. I guess you all have been busy here getting ahead of this earnings call, but one thing I'm curious about is, if I'm asked, right, we're looking at a 22 to 24 percent EBITDA margin over the next few years. What I'm curious about is how much of that is gross margin expansion as opposed to any of the three OPEX items being outsized in terms of where the leverage comes from. Thank you. Yeah, thanks, Terry. It is going to be a mix of both. And I would say, for your modeling purposes, it would be skewed slightly towards OPEX scaling.

Alex Scott: Which is always an indicator plus the deals that are in flight right. Now you have some carryover from the end of the year, just gets busy and holidays getting away. So when I combine all of those things and the engagement, we're getting some executives at our prospects. It gives me a lot of confidence in the pipe for the foreseeable future.

Alex Scott: It should continue to build based on this <unk>.

Alex Scott: Environment, we have around deposits and it's the lifeblood of banks and credit unions right now.

Alex Scott: Okay, great great to hear that you didn't know record bookings didn't didn't exhaust the late stage either that's a good good start for <unk> for this year here.

Alex Scott: Hey, David just on the renewal activity you saw in the fourth quarter. I know this is kind of been a bigger focus area for the company. The last few quarters can you just talk about what you saw in Q4 from expansion on renewal or any other metric that you think you're tracking your investments there. Thanks.

David E. Hynes: So OPEX scaling driving about 60% of that EBITDA improvement over the course of the three years, and gross margin expansion driving about 40%, and I think you can think about that as you model out a, Great, thank you. You bet. Your next question comes from the line of Alex Sklar with Raymond James.

Yes sure Alex.

David: We talked about this previously, but we typically see a lot of renewals take place in Q4, if you go back.

David: A year ago to 2022, we saw about 43% of our renewals happen in Q4. This year is about 38% so relatively aligned.

Alexander Sklar: Your line is open. Great, thank you. Matt, I just want to follow up on Terry's first question, just in terms of following up on the Great Wilkings and your commentary on this macro being a little bit longer lasting, can you just provide some more color on what you're seeing in terms of like pipeline growth or RFP activity? I know you've commented in the past on growth at the start of last year. What are you seeing kind of growth this year in terms of giving you that level of confidence? Well, the combined pipe is larger than it was a year ago in the first quarter.

David: To your question, specifically, we're getting better economics out of the renewals were what were seeing is opportunities to expand our product set we're seeing opportunities to maintain and raise pricing depending upon how the deals were priced years ago at all of that is resulting in more of an uplift as we go through this renewal process and then obviously.

David: That compounds over time, so the more of the teams continue to execute on this like they had the last few quarters. The more that starts to build on our subscription revenue going forward for the next few years.

Speaker Change: Alright, great color. Thank you both thanks Alex.

Speaker Change: Your next question comes from the line of Adam Hotchkiss with Goldman Sachs. Your line is open.

Matthew P. Flake: And as I said, it builds, but I don't have the number on the RFP activity, but we're seeing good activity there, which is always an indicator, plus the deals that are in flight right now. You know, you have some carryovers from the end of the year. It just gets busy, and holidays get in the way.

Adam Hotchkiss: Hey, guys. Thanks for taking the questions I guess, Matt I'd be curious if youre seeing an evolution and change management philosophy with the momentum you saw in Q4 are you seeing a higher proportion of the companies that would typically stick with existing solutions pushed through the anxiety around change friction and go forward with the replacement or is this more just a function of a much wider.

Matthew P. Flake: So when I combine all of those things and the engagement we're getting from executives and our prospects, it gives me a lot of confidence in the pipeline for the foreseeable future. And it should continue to build based on this environment we have around deposits, which is the lifeblood of banks and credit unions right now. Great to hear that the record booking didn't exhaust the late stage either.

Top of funnel and similar levels of conversion any any color there would be helpful.

Adam Hotchkiss: I just think the sense of urgency around these our customers because of what went on in March deposits went to go went to the big for.

Adam Hotchkiss: A lot of those commercial customers got to see the technology that the big four using they came back to people that were using legacy tack and saying, Hey, I want to bank with you, but you've got to upgrade your tech and Thats, where the demands coming from coupled with the breadth and depth of our platform that we can go replace a retail product in small business product corporate product as well.

David E. Hynes: That's a good start for this year here. David, just on the renewal activity you saw in the fourth quarter. I know this has been a bigger focus area for the company in the last few quarters. Can you just talk about what you saw in Q4 from expansion on renewal or any other metric that you're tracking your investments there? Thanks.

Adam Hotchkiss: As all of the fraud solutions.

Adam Hotchkiss: And it drives efficiency drive better user experience makes the bank more efficient and then you couple that with all the data we get off of a single platform. It's a very compelling story. So I think that a lot of the.

David E. Hynes: And, you know, we talked about this previously, but we typically see a lot of renewals. Go back a year ago to 2022, we saw about 43% of our renewals happen in Q4. This year, it's about 38%, so it's relatively aligned.

Adam Hotchkiss: Whether it's tier one tier two or tier three.

Adam Hotchkiss: I hate to say it but fear sells a lot of software in the environment that they ran into in March really got them focused on making these changes and that's why that's why the.

David E. Hynes: And to your question specifically, we're getting better economics out of the renewal. What we're seeing is opportunities to expand our product set. We're seeing opportunities to maintain and raise prices, depending upon how the deals were priced years ago. And all of that is resulting in more of an uplift as we go through this renewal process. And obviously, that compounds over time.

Adam Hotchkiss: The execution of the record year, we had.

Adam Hotchkiss: <unk>.

Adam Hotchkiss: Okay.

Adam Hotchkiss: It was just like I said, something I haven't seen in a long time and that momentum carries into <unk> into 'twenty four so I think this is.

Adam Hotchkiss: A decision that.

Adam Hotchkiss: Banks and credit unions are making that digital is where they have to go to drive user experiences to acquire and retain deposits in this environment. They have to have the best platform out there. So I think they're making the decision to do it and they're overlooking kind of run the bank technology like core and car step card payment card and payments things.

David E. Hynes: So the more the teams continue to execute on this like they have the last few quarters, the more that starts to build on our subscription revenue. All right, great callers. Thank you both.

Adam Hotchkiss: To get the customer experience up to where it needs to be so they can acquire and retain those deposits.

Adam Hotchkiss: Thanks, all. Your next question comes from the line of Adam Hotchkiss with Goldman Sachs. Your line is open.

Speaker Change: Okay. Thanks, Matt that's really helpful. And then David when you talk about the medium term EBITDA margin expansion guidance for $3 to 400 basis points could you give us a better sense for what's embedded there from a revenue mix perspective, I guess said another way if you were to see a bit better performance in the lower margin segments like transactional services would you still.

Matthew P. Flake: Hey, guys, thanks for taking the questions. I guess, Matt, I'd be curious if you're seeing an evolution in change management philosophy with the momentum you saw in Q4. Are you seeing a higher proportion of companies that would typically stick with existing solutions push through the anxiety around change friction and go forward with replacement? Or is this more just a function of a much wider top of the funnel and similar levels of conversion? Any color that would be helpful?

Speaker Change: We expect to be able to achieve that or are you are you more focused on EBITDA dollar generation.

David: Yes, Adam it at first just sort of reiterate the lay of the land around that revenue mix. Obviously, you have the subscription <unk>.

David: <unk> is out there in the 14% average that we're expecting over the next three years.

Matthew P. Flake: I just think the sense of urgency around our customers, because of what happened in March, deposits went to the big four. A lot of those commercial customers got to see the technology that the big four used, and they came back to people that were using legacy tech and said, I want to bank with you, but you've got to upgrade your tech. That's where the demand's coming from, coupled with the breadth and depth of our platform that we can go replace a retail product, a small business product, a corporate product, as well as all the fraud solutions. Good to see you again today. I hate to say it, but F.E.A.R.

David: Our expecting over that period of time and just based on what we know today that continued pressure.

David: Pressure on the the other forms of revenue both transactional and services just think of it as what we've seen over the last few quarters, which is <unk>.

David: Low single digit declines year over year. So if we do start to see a pickup in any of those revenue streams you see some pressure on our gross margins now we feel like we've done a very good job of addressing our spend in other areas of the business to maintain the types of margins that we're committing to and that would certainly be the case here.

David: So if we see some pressure on gross margin based upon incremental revenue.

David: With some of these line items that are lower margin with just our spending to make sure that we hit the targets that we've given you.

Speaker Change: Okay really helpful. Thanks, David.

Speaker Change: Your next question comes from the line of James Faucette with Morgan Stanley. Your line is open.

Matthew P. Flake: sells a lot of software, and the environment that they ran into in March really got them focused on making these changes, and that's why the execution, the record year we had, Q3. Q4. Q5. Q6. Q7. Q8, Q9. Q10. Q11. Q12. Q13. Q14. Q15. Q16. Q17. Q18. Q19.

James Faucette: Great. Thank you so much.

James Faucette: Just.

James Faucette: Paul on the margin question is clearly.

James Faucette: A key objective for you as you said, you're going to adjust expenses et cetera. Accordingly.

James Faucette: How should we be thinking about or at least how are you thinking about where.

James Faucette: The ultimate margin level for the business should be and what you think should be achievable, even if we're looking kind of beyond your three year horizon.

Speaker Change: Yeah, Jason Im assuming youre talking about EBITDA margin and right now, yes, yes, yes, yes, yes.

Matthew P. Flake: Q20. Q21. Q22. Q23. Q23. Q24. Q25. Q26. Q26. Q27.

Speaker Change: Yes.

Jason: This is I've said this is term once before and I think we all agree. This is the case now we're pleased with the targets that we have out to 2026, but doesn't mean, we're done I mean, we certainly feel there is opportunities to continue to expand going going forward from 2006, we're not going to provide an exact number on that but it's not like we get to this 3% to 400 over the next three year.

Matthew P. Flake: Q28, banks and credit unions are making that, you know, digital is where they have to go to drive user experiences. To acquire and retain deposits in this environment, they have to have the best platform out there. So you know, I think they are making the decision to do it, and they are overlooking kind of run the bank technology like core and card stuff, card, and payments things to get the customer experience up to where it needs to be so they can acquire and retain those deposits. Okay, thanks, Matt. That's really helpful.

Jason: And we are stopping we certainly feel like there is continued opportunities to continue to expand.

Jason: Not going to give specifics on that nor are we going to give an exact number.

Jason: But the efficiencies that we're driving across the organization are sustainable we can build on those over time and as a company that's approaching at some point down the road $1 billion, we certainly get scale out of a lot of the things that we're doing as a company and we have certain aspects of our cost structure, that's fixed and as we continue to grow the business.

Jason: The margins naturally expand from there.

Speaker Change: Okay. That's super helpful and then.

David E. Hynes: And then, David, when you talk about the medium-term EBITDA margin expansion guidance of three to 400 basis points, can you give us a better sense for what's embedded there from a revenue mix perspective? I guess that's another way of saying that if you were to see a bit better performance in the lower margin segments, like transactional services, would you still expect to be able to achieve that? Or are you more focused on EBITDA dollar generation? Yeah, I mean, first, just to sort of reiterate the lay of the land around that revenue mix. Obviously, you have the subscription numbers out there in the 14% average that we're expecting over the next three years. We are expecting, over that period of time, and based on what we know today, the continued pressure on the other forms of revenue, both transactional and services, just think of it as what we've seen over the last few quarters: low single-digit declines year over year.

Speaker Change: Capital allocation you mentioned in the release that one of the primary uses of your free cash flow would be to to service debt and I would imagine that.

Speaker Change: Should be some some enterprise you shift to equity from that but can you rank order for us how youre thinking about capital allocation generally.

Speaker Change: And how should we think about how that may change as free cash flow conversion improves and you bring down.

Speaker Change: Debt levels are you looking at does it make more sense to do buybacks or acquisitions to further expand the capability of that you can deliver to customers just trying to think how youre thinking about rank order prioritization right now.

Speaker Change: Yes, Jason I'll start off and I'll hand, it over to Jonathan you can talk a little bit about the M&A landscape, obviously, thats one avenue to deploy our capital, but as we sit here today given that given the backdrop that we have from a macro standpoint, and the debt that we have coming due in 'twenty, five and 26 <unk> focused on continuing to generate cash and that cash as.

David E. Hynes: So if we do start to see a pickup in any of those revenue streams, you'll see some pressure on our gross margins. But we feel like we've done a very good job of addressing our spend in other areas of the business to maintain the types of margins that we're committing to. And that would certainly be the case here. So if we see some pressure on gross margin based upon incremental revenue from some of these line items that are lower-margin, we'll adjust our spending to make sure that we hit the target. Okay, really helpful.

Speaker Change: We sit here today will be used to retire the debt.

Speaker Change: But as environments typically do they will they may change, but Jonathan can give you the lay of the land on how he sees things today, and then how we might be able to pivot going forward.

Jonathan Pryce: Yes, Hey, James we feel pretty confident that the timing of as we work through the converts and we scale our free cash flow profile, but that will tie them up pretty well with when we expect to see opportunities come to the table with more realistic value expectations and higher quality assets. Even here in early 2020 for the M&A pipeline.

David E. Hynes: Thanks, David. Your next question comes from the line of James Fossett with Morgan Stanley. Your line is open. Great, thank you so much.

James Fossett: I want to just follow on the margin question, which is clearly a key objective for you. How should we be thinking about, or at least how are you thinking about, where the ultimate margin level... I should be achievable even if, Yeah, James, I'm assuming you're talking about EBITDA margin and, you know, right now we... Yeah, yeah, yeah, yeah, yeah. Yeah, and look, we're, I've said this term once before, and I think we all agree this is the case now.

Jonathan Pryce: Tends to still be skewed with folks that haven't yet adjusted to public market valuations that have taken place over the last several months and also the higher quality assets that are willing to come to market. So as we get into the back of <unk> 24, and <unk> 25, I think youre going to see more volume in the M&A markets broadly and I think we'll be in a stronger position will be more <unk>.

<unk> from a balance sheet perspective to be competitive in those deals and so I think it's a longer term opportunity when we think about capital allocation via M&A.

David E. Hynes: We're pleased with the targets that we have out to 2026, but it doesn't mean we're done. I mean, we certainly feel there's opportunity. Q2 Holdings Inc., We certainly feel like there's continued... Q2 Holdings Inc. Yeah, okay, that's super helpful. And then on capital allocation, you mentioned in the release that one of the primary uses of your free cash flow would be to service debt. And I imagine Q1.

Speaker Change: Great. Thank you so much for the color there.

Thanks James.

Speaker Change: Your next question comes from the line of Joseph <unk> with Canaccord Genuity. Your line is open.

Joseph: Hey, guys. Good afternoon, my congratulations as well, maybe if we start with.

David E. Hynes: Can you rank order for us how you are thinking about capital allocation generally, and how should we think about how that may change as free cash flow conversion improves and you bring down debt levels? Does it make more sense to do buybacks or acquisitions to further expand the capability of Delivered to customers? I'm trying to think of how you're thinking about rank order priorities. Yeah, Jays, I'll start off, and I'll hand it over to Jonathan.

Joseph: It sounds like Youre doing well competitively in the marketplace and obviously, it's still a dog eat dog competitive landscape, but just wondering if if you're if you have any pricing power in the business now versus a couple of years ago and generally how the pricing environment is not all of them.

Speaker Change: Follow up.

Speaker Change: Yes, Joe I mean, if you look at our Asps thereof.

Speaker Change: Pipeline is asps are up and so we're able to drive.

David E. Hynes: He can talk a little bit about the M&A landscape. It's obvious that it's one avenue to deploy our capital. I mean, but as we sit here today, given the backdrop that we have from a macro standpoint and the debt that we have coming due in 2025 and 2026, we're maniacally focused on continuing to generate cash, and that cash, as we sit here today, will be used to retire the debt. But, as environments typically do, they may change.

Speaker Change: The price we want we don't really get into the price game too much.

Speaker Change: We are customers or prospects I guess are ones that are looking to use this technology as a weapon. Another shield and so we continue to with that group of people go achieve is usually not.

Speaker Change: Actually probably the product theyre running on there's probably a little less expensive. So they understand that it's expensive to build this expensive to support it is expensive to deliver it and so we believe they're receiving a fair value for it but also.

David E. Hynes: But Jonathan can give you the lay of the land on how he sees things today and then, you know, how we might be. Hey, James, we feel pretty confident that the timing of as we work through the converts and we scale our free cash flow profile will time out pretty well with when we expect to see opportunities come to the table with more realistic value expectations and higher quality assets. You know, even here in early 2024, the M&A pipeline tends to still be skewed with folks that haven't yet adjusted to public market valuations that have taken place over the last several months. And also, you know, not the higher quality assets that are willing to come to market.

Speaker Change: Want us to be around they want us to be profitable in many of our customers are excited about our progress on profitable growth.

Speaker Change: Hi.

Speaker Change: We continue to to be able to command the price we need in these strategic deals because we're able to sell the value of the platform that they get for what is customer experience operating efficiency you are using the data down the road for them. So all of that is really differentiated us in the market and that shows up in asps as they continue to go up.

Speaker Change: Great and then just kind of understanding of the converts are coming in.

Speaker Change: Really focused on the.

Speaker Change: On the debt pay down, but you know.

Speaker Change: If that were not the case, how do you feel about the overall product suite right now.

Jonathan Price: So as we get into the back of 2024 and into 2025, I think you're going to see more volume in the M&A markets broadly. And I think we'll be in a stronger position, and we'll be more credible from a balance sheet perspective to be competitive in those deals. And so I think it's a longer-term opportunity when we think about capital allocation via M&A. Great, thank you so much for the color.

Speaker Change: Are there areas to continue to expand I mean, we're seeing a lot of traction for example in a lot of these next generation lending all goes and the like just you know I mean.

Speaker Change: Without giving up the strategic secret sauce.

Speaker Change: How do you how do you look at the product roadmap and are there some nice areas to add on to the overall portfolio at this point thanks a lot.

Joseph Vafi: Thank you. Your next question comes from the line of Joseph Vafi with Canaccord Genuity. Your line is open. Hey guys, good afternoon. My congratulations as well.

Speaker Change: Yes, Joe I would just say that.

Speaker Change: We invested a lot in the product in 2020, one and 'twenty two.

Speaker Change: Across the board that means user experience commercial fraud relationship pricing.

Matthew P. Flake: Maybe we should start with, you know, it sounds like you're doing well competitively in the marketplace. And, obviously, it's still a dog-eat-dog competitive landscape. But just wondering if you have any pricing power in the business now versus a couple years ago, and, and generally how the pricing environment is, and then I'll have a follow-up. Yeah, Joe. I mean, if you look at our ASPs, they're up. The pipeline's ASPs are up. So, you know, we're able to drive the price we want; we don't really get into the price game too much.

Speaker Change: <unk> some of the things we've talked about there are other products that are coming out we're investing in AI. So we're committed to investing in all of those products. We're going to continue to do it where we still run at 19% on R&D and somewhere in that area. So.

Speaker Change: <unk>.

Speaker Change: I tell people that whenever the customer prospects tell me I'm. Good I don't I don't need to build anything then we will slow down but right. Now there is we're trying to digitize every experience you do in person or over the phone with a bank and trying to do that on a mobile phone a tablet or desktop and Theres a lot of features and functionalities, we've got to build.

Speaker Change: Both for the end user as well as for the bank to make them more efficient and provide better experiences. So.

Matthew P. Flake: We, we, our customers, our prospects, I guess, are ones that are looking to use this technology as a weapon and not as a shield, and so we continue to, with that group of people, going cheap is usually not, it's actually probably the product they're running on is probably a little less expensive, so they're, they understand that it's expensive to build this, it's expensive to support it, it's expensive to deliver it, and so we, we believe they're receiving a fair value for it, but also, you know, they want us to be around, they want us to be profitable, many of our customers are excited about our, our, our progress on profitable growth, so I, you know, we, we can, we continue to, to be able to kind of command the price we need in, in these strategic deals because we're able to sell the value of the platform that they get for it, whether it's customer experience or operating efficiency or using the data down the road for them, so all that is, has really differentiated us in the market, and that shows up in ASPs as they continue to go up. Great and then just kind of understanding that the converts are coming and you know you're really focused on the, on the debt pay down. But you know, you know, if that were not the case, how do you feel about the overall product suite right now? Are there areas to continue to expand?

Speaker Change: All of those areas are places, we're investing in and we're going to continue to do that because it's what differentiates us and it's what gives us.

Speaker Change: Durability in this company to be able to achieve our targets over the next five to 10 years.

Speaker Change: Hey, Joe just to build on <unk> point.

Joe: The aspect of us servicing and retiring our debt.

Joe: In no way shape or form prevents us from investing in the products that is critically important for us always has been still has.

Joe: We're continuing to prioritize the key investments in the product that our customers want and need most that does not change because of the debt coming due.

Speaker Change: Got it thanks for that color guys great quarter. Thanks, Joe.

Speaker Change: Your next question comes from the line of Dave Chowdhry with William Blair. Your line is open.

Dave Chowdhry: Hey, good afternoon, guys. Thanks for taking our questions.

Dave Chowdhry: I guess on fabric realize it's early days there, but could you kind of comment on some of the initial I think you've been seeing over the last couple of months since you've kind of been getting a lot of interest from your existing customer base since the product was launched.

Speaker Change: Yes. Thanks.

Speaker Change: Is where the early focus has been is on the existing customers and we're having lots of conversations I think it ties back to Matt's point around their orientation around deposits and when they think about fabric. It it's an opportunity for them to leverage an existing solution. They already have with the digital banking product tied into our lightweight core and so those conversations are going well.

Speaker Change: Pipeline looks great. It's early so it's just it's too early to call how much.

Speaker Change: Excitement, we expect to see in terms of bookings philosophy here in the early part of 'twenty four but we're seeing the right signs of interest from our customer base.

Matthew P. Flake: I mean, you know, we're seeing a lot of, you know, traction, for example, and a lot of these next-generation lending algos and the like. Just, you know, without giving up the strategic secret sauce, how do you look at the product roadmap? And are there some nice areas to add on to the overall portfolio at this point? Thanks a lot.

Speaker Change: And.

Speaker Change: Tons of strategic conversations and they are all around deposit gathering strategies retention and growth for these institutions and it's across banks and credit unions.

Speaker Change: All asset sizes across the spectrum. So we're pretty excited and seeing good evidence that the strategy is making sense, but we just got to execute and see how these conversations come to fruition over the next few months to give you more color.

David E. Hynes: Yeah, Joe, I would just say that we invested a lot in the product in 20 and 21, and 22. Across the board, that means... User Experience, Commercial, Fraud, Relationship Pricing, Helix, some of the things we've talked about there, our other products that are coming out, we're investing in AI, so we're committed to investing in all of those products. We're going to continue to do so. We still run at 19% on R&D and somewhere in that area, and so I tell people that whenever the customer prospects tell me I'm good, I don't need to build anything. Then we'll slow down. We're trying to digitize every experience you do in person or over the phone with a bank and trying to do that on a mobile phone, a tablet, or a desktop. And there are a lot of features and functionalities we've got to build both for the end user as well as for the bank to make them more efficient and provide better experiences.

Okay good to hear.

Speaker Change: And I know you guys kind of commented already on M&A.

Speaker Change: M&A opportunities potentially in the future, but thinking some of your some of your recent.

Speaker Change: Acquisitions over the last couple of years click switches from under sensible.

Speaker Change: As you kind of reflect on these deals could you kind of generally comment on maybe how they performed relative to your expectations. Thanks.

Speaker Change: Yes, I mean, I think and we think about the most recent deals I mean, we're seeing them being in some cases heavily cross sold alongside platform deals on the digital banking side and I think about a deal like sensible, where the use cases now across our AI initiatives internally are very prevalent and theyre driving it they are using their technology in unique ways to drive cost efficiencies out of our business.

So when we think about the most recent deals we're certainly excited about it as we go back in time, obviously different valuation paradigm. So.

Speaker Change: That element of thinking through those deals, but very strategic even as we think about relationship pricing today, the biggest acquisition we've ever done.

David E. Hynes: All of those areas are places we're investing in, and we're going to continue to do that because it's what differentiates us and it's what gives us durability in this company, to be able to achieve our targets over the next five to ten years. And hey, Joe, just to build on Matt's point, the... The aspect of us servicing and retiring our debts in no way, shape, or form prevents us from investing.

Speaker Change: In the deposit environment. We're in today that product is very topical for our banks, especially the up market enterprise space and so feel really good about that and just one thing I will add to the sort of M&A discussion here is when we think about the future of what we're seeing also on the innovation studio side, we've got a ton of visibility into the adjacent areas that are banks and credit unions really.

David E. Hynes: That is critically important for us, always has been, and still is. We're continuing to prioritize the key investments in the products that our customers want and need most. That will not change.

Speaker Change: Care about what their customers want to see their banks and credit unions adopt technology wise and so thats very informative for us as we think about the longer term arc of where we need to go as a company be it organically or inorganically, but we get to see those those products in action and we get to see how their clients use it and so I think thats an important point to think about how we get.

Joseph Vafi: Got it. Thanks for that caller, guys. Great quarter. Your next question comes from the line of Adib Chowdhury with William Blair.

Adib Chowdhury: Your line is open. Q2 Holdings Inc. Hey, good afternoon, guys. Thanks for taking our questions. I guess on Fabric, I realize it's early days there, but could you kind of comment on some of the initial uptake you've been seeing over the last couple of months and if you've kind of been getting a lot of interest from your existing customer base since our product? Yeah, thanks. That is where the early focus has been on existing customers. And yeah, we're having lots of conversations. I think it ties back to Matt's point around their orientation around deposits.

Speaker Change: Informed around whether it's areas like small business applications payments like where are the adjacent areas to one of the earlier questions that we don't play in today that maybe we need to in the longer term.

Speaker Change: That's pretty exciting from a longer term perspective, so I just want to throw that in there as well.

Speaker Change: No that makes a ton of sense. Thanks, guys I appreciate it thanks.

Speaker Change: Thank you.

Speaker Change: Your next question comes from the line of Parker Lane with Stifel. Your line is open.

Speaker Change: This is Matthew on for Parker, Thanks for taking my questions and congrats on the record bookings in large tier ones you saw in Q4.

Jonathan Price: And when they think about fabric, it's an opportunity for them to leverage an existing solution they already have with the digital banking product, tied into our lightweight core. And so those conversations are going well. We're seeing the right signs of interest from our customer base. There are just tons of strategic conversations, and they're all around deposit gathering strategies.

Matthew: First given the increase in that backlog have you given any thought to allocating more resources there to flow that through to revenue quicker.

Speaker Change: Yes look we are very focused on delivering these in an effective manner.

Speaker Change: We've been doing this now for 20 years, and certainly understand how to slot. These and the resources that are needed to do so so we are certainly dedicating capital towards getting the right resources in place and quite frankly, making the implementation processes.

Jonathan Price: Q2 Holdings Inc., All asset sizes across the spectrum, so we're pretty excited and seeing good evidence that the strategy is making sense, but we've just got to execute and see how these conversations come to fruition over the next Q2 Holdings Inc. Okay, good to hear. And I know you guys kind of commented already on M&A opportunities potentially in the future, but you know, thinking about some of your recent or your acquisitions over the last couple of years, Quick Switch, Precision Launder, Sensible, as you kind of reflect on these deals, could you kind of generally comment on maybe how they performed relative to your expectations? Yeah, I mean, when we think about the most recent deals, I mean, we're seeing them being, in some cases, heavily cross-sold alongside platform deals on the digital banking side.

Seamless as it possibly can be so driving efficiencies through that process, but yes, we're very focused on that.

Speaker Change: Okay got it.

Speaker Change: And as you continue to rollout your Anda.

Speaker Change: Our solution in <unk> for what has been the feedback and demand been like since we last spoke.

Speaker Change: Is there any additional functionality you'd be looking to add to that future.

Speaker Change: Yeah, Hey, it's Mark I'll take that question.

Mark: We've had really good early feedback so we're in pilot with that right now we're getting kind of live feedback not just from like project teams.

Mark: Commercial bankers, who are really actually using that every day. So it's still really early in that product development lifecycle, but we're very.

Mark: Very happy with the engagement, we're getting from our customers and their willingness to work with us on that and Thats kind of spreads into other areas as well as we sort of look for other opportunities to use AI across our business, both internally and in the products that we deliver straight to our customers.

Speaker Change: Terrific. Thank you thanks, Matt Thanks, Matt.

Speaker Change: Your next question comes from the line of Matthew Van Fleet of BTG. Your line is open.

Jonathan Price: And I think about a deal like sensible, where the use cases now across our AI initiatives internally are very prevalent, and they're driving it. They're using their technology in unique ways to drive cost efficiencies out of our business. So when we think about the most recent deals, we're certainly excited about them. But as we go back in time, obviously, you know, different valuation paradigms. So you know, there's that element of thinking through those deals, but very strategic, even as we think about relationship pricing today, the biggest acquisition we've ever done in the deposit environment we're in today, that product is very topical for our banks, especially in the upmarket enterprise space. And so I feel really good about that.

Speaker Change: Hi, good afternoon, thanks for taking the question.

Speaker Change: You mentioned in the prepared remarks to the innovation studio is continuing to be one of the biggest factors in driving new customer growth and then you also mentioned that has great visibility into the M&A pipeline, but curious on sort of how much contribution to the.

Speaker Change: Q2, P&L youre seeing from that and when when if at all do we realize that as a kind of a big top and bottom line driver or is this always just viewed as.

Jonathan Price: And you know, just one thing I'll add to the sort of M&A discussion here is that when we think about the future of what we're seeing, also on the innovation studio side, we get a ton of visibility into the adjacent areas that our banks and credit unions really care about what their customers want to see their banks and credit unions adopt technologically. And so that's very informative for us as we think about the longer-term arc of where we need to go as a company, be it organically or inorganically, but we get to see those those products in action; we get to see how their clients use them. And so I think that's an important point to think about how we get informed about whether it's areas like small business applications, payments, like the adjacent areas to one of the earlier questions that we don't play in today but maybe we should in the longer term. That's, that's pretty exciting for the longer term perspective. So I just want to say, No, yeah, that makes a ton of sense. Thanks, guys. I appreciate it. Thank you. Your next question comes from the line about Parker Lane with Stiefel. Your line is open. This is Matthew Kickert for Parker.

Speaker Change: A great extension of the platform gives more value to what youre delivering in the monetization of it directly.

Speaker Change: Isn't as much of the story in the near term.

Speaker Change: Yeah, Hey, Matt I would say I mean, I think look we saw outsized growth.

Speaker Change: From a revenue perspective, let's say well north of 50%, but we're still just talking from a small base and so we haven't disclosed explicitly.

Speaker Change: What that is for the innovation studio line item longer term, we very much still have conviction that this is both a strategic.

Speaker Change: Elements of our business that has an impact on retention and winning new deals, but also a financial one both on the top line in terms of the revenue impact and the margin profile because it tends to begin and it is entirely net revenue that we're recognizing in this model. So it is a longer cycle to where this is going to be material enough to disclose separately, but we.

Speaker Change: Still very much a conviction that it's both.

Speaker Change: And we were very happy with the year, we would put forward from a from a financial perspective on our side in 'twenty three it's just relatively small numbers compared to the disclosures we have out there on the other lines of business.

Speaker Change: Okay very helpful and then.

Speaker Change: We continue to have great success on the cross selling side of it but I'm curious looking at the opposite.

Parker Lane: Thanks for taking my questions and congratulations on the record bookings and large tier wins you saw in Q4. First, given the increase in that backlog, have you given any thought to allocating more resources there to flow that through to revenue quicker? Yeah, look, we are very focused on delivering these in an effective manner. You know, we've been doing this now for 20 years, and certainly understand how to allocate these and the resources that are needed to do so. We are certainly dedicating capital towards getting the right resources in place and quite frankly making, The Bulletproof Executive 2013. Q2 Holdings Inc. Okay, I got it. And then, as you continue to roll out your Andy AI solution in 2024, what has the feedback and demand been like since we last spoke? Is there any additional functionality you'd be looking to add to that feature? Yeah, it's Kirk.

Speaker Change: <unk>.

Speaker Change: Do you feel like Youre at in terms of wallet share.

Speaker Change: It's with maybe a tier one customers or even across the entire customer base, but how.

Speaker Change: Much more can we expect you to have in terms of growth with the current product set.

Speaker Change: Our existing customers compared to going out and finding new logos to maintain growth.

Speaker Change: Yes, Matt it's a hard number to quantify but if you think about the customers that we have we have 115 customers that are more than $10 billion in assets you have relationship pricing.

Speaker Change: You have the ability to sell either commercial or retail into a significant number of those plus our fraud products you have innovation studio.

Speaker Change: The opportunities it's really early for us in these opportunities one of the tier ones. We did in the quarter was a commercial cross sell to a retail customer that was one of the tier one so there's a lot of those opportunities and when you look at the renewals that we did.

Kurt Coleman: I'll take the question. It's a we've had really good early feedback. So we're in pilot with like that right now. So we're getting kind of live feedback, not just from the project. Commercial Bankers who are, Q2 Holdings Inc. I'm really happy. And that's kind of spread to the other areas as well.

Speaker Change: They were up 75% or whatever year over year in the fourth quarter.

Speaker Change: That's a customer that sticking with you for another five years and so that typically means youre going to be able to cross sell more of the products. So that ties to the R&D. The innovation the roadmap that we have and we're constantly building new things, whether it's our AI product R&D co pilot.

Operator: The Bulletproof Executive 2013, Terrific, thank you. Your next question comes from the line of Matthew VanVliet of BTIG. Your line is open. Yeah, good afternoon.

Speaker Change: Are any of those products. So there is a tremendous amount of greenfield for us to go and cross sell into this customer base, which provides us a lot of comfort as we think about that.

Matthew David VanVliet: Thanks for taking the question. You mentioned in the prepared remarks that Innovation Studio is continuing to be one of the biggest factors in driving new customer growth. And then you also mentioned great visibility into the M&A pipeline, but curious about sort of how much contribution to the Q2 P&L you're seeing from that? And when, when, if at all, do we realize that as a kind of a big top and bottom line driver? Or is this always just viewed as, you know, a great extension of the platform gives more value to what you're delivering, and the monetization of it directly, maybe isn't as much of the story in the near term?

Speaker Change: The coming years on revenue and profitability.

Speaker Change: Alright very helpful. Thank you thanks, Matt.

Speaker Change: Your next question comes from the line of Andrew Smith with Citigroup Global markets. Your line is open.

Andrew Smith: Hey, guys. Thanks for taking my questions.

Andrew Smith: Just wanted to dig in on the 14% subscription growth.

Andrew Smith: Embedded in the longer term outlook certainly appreciate the longer term outlook here.

Andrew Smith: Can you talk about just the drivers at a high level.

Andrew Smith: We think about net new clearly have some good visibility probably through at some point in 2025.

Andrew Smith: But the other growth drivers, maybe cross sell our existing user growth, perhaps you could talk to those a little bit in terms of what gets yet at 14% and what could kind of viasat.

David E. Hynes: Yeah, hey, Matt, I would say, I mean, I think, look, we saw outsized growth, from a revenue perspective, you know, let's say well north of 50%, but we're still just talking from a small base. And so we haven't disclosed explicitly what that is for the Innovation Studio line item. Longer term, we very much still have conviction that this is both a strategic element of our business that has an impact on retention and winning new deals, but also a financial one, both on the top line in terms of the revenue impact, and the margin profile, because it tends Q Clementin talked about what what we're investing in the mutual fund as a weekly public weiterhin debt investment in this revenue that we're recognizing in this model so it is a longer cycle too were this is going to be a material enough to disclose separately but we still very much of conviction that it's both and we were very happy with year we put forward from a financial perspective on our side in 23 it's just relatively small numbers compared to the squares ZE out there on the other, Okay, very helpful.

Speaker Change: One way or another thanks, a lot guys.

Yeah sure Andrew Youre.

Speaker Change: You are right I mean, we do have a lot better visibility into 2025 based upon the large opportunities that we wanted to drill into 2023.

Speaker Change: That's factored into the numbers, we provided the 14% in this instance, as you look forward and try to bifurcate. If you will between Cros and net new Youre typically going to see and this is what we've seen historically, we don't think it's going to change dramatically anywhere from 60% to 70% coming from net new of the remainder coming from Cros.

Speaker Change: But we do see over the over a course of time those will start to converge I don't think theyre going to converge to dramatically when we get out to 2026, but as you go model beyond that I think you start to see a little bit more coming from cross a little bit less from that new but for the next three years. We continue to think that we have a lot of opportunity with net new a lot of them are coming online obviously in 2025 from the book.

Speaker Change: As I've said and then in 2026, that's going to be driven predominantly by the bookings that we do this year in the first half of 2024 excuse me 2025.

David E. Hynes: And then you continue to have great success on the cross-selling side of it, but I'd be curious to look at the opposite angle of, where do you feel like you are in terms of wallet share, whether it's with maybe tier one customers or even across the entire customer base, but how much more can we expect you to have in terms of growth with the current product set at your existing customers compared to going out and finding new logos to maintain growth? Yeah, Matt, that's a hard number to quantify.

Speaker Change: Okay.

Speaker Change: Got it. Thank you for that David and then if you could just asking sales cycle, so topical and that the election is coming up and if I remember back to 2016, there was a little bit of a malaise in the sales cycle. As a result of uncertainty obviously I think we're going to get the time period from a technology adoption perspective, with banks and credit unions, but.

Speaker Change: Maybe you can talk to your kind of.

Speaker Change: You've talked about this previously on the call but.

Speaker Change: If theres anything you are hearing from banking executives about sort of the therapy.

Matthew P. Flake: But if you think about the customers that we have, you know, we have 115 customers that are more than 10 billion in assets, you have relationship pricing, you have the ability to sell either commercially or retail to a significant number of those plus our fraud products, you have Innovation Studio. The opportunities; it's really early for us to take advantage of these opportunities. One of the Tier 1s we did in the quarter was a commercial cross-sell to a retail customer that was one of the Tier 1s, so there are a lot of those opportunities, and when you look at the renewals that we did, they were up 75% or whatever year over year in the fourth quarter. That's a customer that's sticking with you for another five years, and so that typically means you're going to be able to cross-sell more of the product, so that ties to the R&D, the innovation, the roadmap that we have, and we're constantly building new things, whether it's our AI product or Andy Copilot or any of those products, so there's a tremendous amount of greenfield for us to go and All right, very helpful.

Speaker Change: Their view heading into the rest of this year. Thanks a lot.

David: Yes, Andrew.

Speaker Change: I don't have a lot of commentary on the election 16 was a unique year, because yet too unknown commodities and there was a lot of uncertainty.

Speaker Change: <unk> was more Covid focused and then this year, who knows how it's going to play out but right now theres two known commodities.

Speaker Change: I haven't heard any any slowdown I don't want to predict it all have a crystal ball I don't know what's going to happen but.

It will definitely be interesting in.

Speaker Change: In the November call, because it'll be right around the election to see where things land, but.

Speaker Change: I don't think you have the.

Speaker Change: Barring something unforeseen.

Speaker Change: People know, what youre going to get with the two.

Speaker Change: Candidates that are looking at but I haven't heard much out of our customers or prospects around the election, yet as it gets closer I'm sure we will but.

Speaker Change: As long as you have a solid pipeline you may you may get some decisions delayed you may not but.

Speaker Change: After theres nothing after it's done it's done and Youll get those decisions done so.

Speaker Change: Im not seeing it yet, but we'll report back probably to have more information in August of how Thats looking but right now theres no.

Speaker Change: As I said the pipe is solid we feel like we're going to have a solid first half of the year and continue to build the pipe and we can control what we can control and the other stuff, we just got to manage through.

Matthew P. Flake: Your next question comes from the line of Andrew Schmidt with Citi Global Markets. Your line is open. Hey guys, thanks for taking my questions. I just wanted to dig in on the 14% subscription growth that's embedded in the longer-term outlook and certainly appreciate the longer-term outlook here. Can you talk about just the drivers at a high level?

Speaker Change: Absolutely. Thanks, a lot Matt I appreciate the comments thanks.

Speaker Change: The next week.

Speaker Change: And your final question comes from the line of Dan Perlin with RBC. Your line is open.

Dan Perlin: Thanks, I just had a question kind of about the.

Dan Perlin: I guess the Optionality of like this pull forward in demand like are you concerned that all of these things are kind of hitting at the right time Youre clearly capturing it there is this.

Andrew Schmidt: We think Net New clearly has some good visibility, probably through at some point in 2025, but the other growth drivers may be cross-sell or existing user growth. Perhaps we could talk through those a little bit in terms of what gets you that 14% and what could kind of buy us that one way or another. Thanks a lot, guys. Yeah, sure, Andrew. And you're right.

Dan Perlin: Massive deposit gathering mentality in the market. These days and I'm just trying to make sure as we sit here and think about calibrating. This and I know you gave.

Dan Perlin: To meet your target. So you obviously have a lot of conviction visibility, but do you think there was like a pull forward that's happening right now and it does it continue kind of into the early part of next year and then it kind of tapers off of just I'm, just trying to get a sense of how you're thinking about that.

David E. Hynes: I mean, we do have a lot better visibility into 2025 based upon the large, Q2 Holdings Inc., Q3, and that's factored into the numbers we provide. As you look forward and try to bifurcate, if you will, between cross and net new, you're typically going to see, and this is what we've seen historically; we don't think it's going to change dramatically, anywhere from 60 to 70 percent coming from net new, the remainder coming from cross. But we do see that over the course of time, those start to converge.

Dan Perlin: Yes, I think if you think about rates, which is what's driving this demand for deposits and then the shrinking money supply.

Dan Perlin: Deposits are going to be critical for the foreseeable future and so I don't see rates going down as fast as they went.

Dan Perlin: Yes, going down as fast as they went up and so I think youre going to have for the foreseeable future as far as I can see deposits being at the center of the universe for these for our customers and prospects. So.

Dan Perlin: Hard to say, what's going to happen out in 'twenty five but.

Dan Perlin: I'm going to make hay, while the Sunshine and Thats what were doing so.

David E. Hynes: I don't think they're going to converge too dramatically when we get out to 2026, but as you go a mile beyond that, I think you start to see a little bit. Q2 Holdings Inc., Got it. Thank you for that, David. And then if we could just ask about the sales cycle, so, you know, topical and that the election is coming up, and if I remember back to 2016, there was a little bit of a malaise in the sales cycle as a result of uncertainty. Obviously, I think we're in a different time period from a technology adoption perspective with banks and credit unions, but maybe talk through kind of what there is – and I know you've talked about this previously on the call, but if there's anything you're hearing from bank executives about sort of their view heading into the rest of this year. Thanks a lot.

As long as there's those opportunities out there.

We're going to continue to go hard at them and try to win them and deliver them and keep them happy and grown like we've done and try to have 2030 year relationships with these customers.

Speaker Change: Yeah totally agree just another it's a kind of a follow up to an earlier question, but you've got this massive.

Speaker Change: Backlog, you're starting to see this subscription they are really start to take off.

Speaker Change: But the growth rate for the year in aggregate is pretty similar to 2000 <unk> numbers in terms of the guidance. So youre not seeing a total revenue number that's accelerating materially despite the fact that big bolus of demand.

Speaker Change: So you talked a little bit about I guess trying to prioritize implementation cycles, but like is there an opportunity that we could actually see like material reacceleration coming out of 24, and the 25 or is this just a really good visibility as you sit here today and we should just be comfortable with that.

Andrew Schmidt: Yeah Andrew, I don't have a lot of commentary on the election. You know 16 was a unique year because you had two unknown commodities and there was a lot of uncertainty. www.terrytandyson.com Q2 Holdings Inc. As long as you have a solid pipeline, you may get some decisions delayed, you may not, but after it's done, it's done, and you'll get those decisions done. So I'm not seeing it yet, but we'll report back, probably have more information in August on how that's looking. As I said, the pipe is solid.

Speaker Change: Yeah, Dan in Matt's prepared remarks, you did mention that based upon the bookings momentum. We saw in Q4, we do expect to see a subscription acceleration in 2025, so that's sort of embedded in that average, 14% number where you see a little bit of pressure has continued.

Speaker Change: Wins on this transactional and services, but the reality of that is over time that number becomes a smaller and smaller part of the mix. So you've got to fit that into the calculus of how you model the business going forward, which is why we've been focusing on subscription.

Matthew P. Flake: We feel like we're going to have a solid first half of the year and continue to build the pipe. The Bollinger Band, LLC. Absolutely. Thanks a lot, Matt. I appreciate the comment.

Speaker Change: It's going to breach that 80% market. Some point soon and it's obviously has an increasing importance to our profitability as well.

Dan Perlin: The Bulletproof Executive, 2013. And your final question comes from the line of Dan Perlin with RBC. Your line is open. Thanks. I just had a question kind of about the, I guess, the optionality of this pull forward in demand, like, are you concerned that all of these things are kind of hitting at the right time, you're clearly capturing it, there is this massive deposit gathering mentality in the market these days. And I'm just trying to make sure, as we sit here and think about calibrating this, and I know you gave, you know, three of your targets. So I mean, you obviously have a lot of conviction and visibility.

Speaker Change: Nope, that's great great quarter guys. Thank you.

Speaker Change: Thanks, Dan I appreciate it.

Speaker Change: And that will conclude today's conference call. We thank you for joining you may now disconnect your lines.

Speaker Change: Please wait the conference will begin shortly.

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Matthew P. Flake: But do you think there's been like a pull forward that's happening right now? And does it continue kind of into the early part of next year, and then it kind of taper off? I'm just trying to get a sense of how you're thinking about that. Yeah, I mean, I think if you think about rates, which is what's driving this demand for deposits and then the shrinking money supply.

Speaker Change: Sure.

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Matthew P. Flake: Q3. What are the future prospects of the company? A.

Speaker Change: Yes.

Matthew P. Flake: The future prospects of the company are going to be critical for the foreseeable future. I don't see rates going down as fast as they went up. I think you're going to have, for the foreseeable future, as far as I can see, deposits being at the center of the universe for our customers and prospects. It's hard to say what's going to happen out in 2025. I'm going to make hay while the sun's shining, and that's what we're doing. So, as long as there are those opportunities out there, we're going to continue to go hard at them and try to win them and deliver them and keep them happy and grow them like we've done and try to have 20, 30-year relationships with these customers. Yep, I totally agree. Just another, it's kind of a follow-up to an earlier question, but, you know, you've got this massive backlog, and you're starting to see this, this subscription AR really start to take off. But the growth rate for the year in aggregate is pretty similar to 23's numbers, you know, in terms of the guide.

Speaker Change: Okay.

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Dan Perlin: So you're not seeing a total revenue number that's accelerating materially despite the fact you get this big bolus of demand. So, you talked a little bit about, I guess, trying to prioritize implementation cycles, but, like, is there an opportunity that we could actually see, like, material reacceleration coming out of 24 into 25, or is this just really good visibility, as you sit here today, and we should just be comfortable with that? Yeah, Dan, in Matt's prepared remarks, he did mention that based upon the bookings momentum we saw in Q4, we do have questions for the Vegas Mint. Questions for the Vegas Mint?

Speaker Change: Yes.

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Speaker Change: Please wait the conference will begin shortly.

Operator: P33 P33 P33 Q2 Holdings Inc. P33, Thank you. And that will conclude today's conference call. We thank you for joining us. You may now disconnect your lines.

Speaker Change: Yes.

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Operator: Please wait; the conference will begin shortly. Please stand by for the conference to begin. Please stand by for the conference to begin. Please stand by for the conference to begin. Please stand by for the conference to begin. Please stand by for the conference to begin. Please stand by for the conference to begin. Please stand by for the conference to begin. Please stand by for the conference to begin. Please wait. The conference will begin shortly.

Speaker Change: Okay.

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