Q1 2024 Q2 Holdings Inc Earnings Call
Good afternoon. My name is Pam and I will be conference operator today at this time I would like to welcome everyone to the Q2 holdings first quarter 'twenty 'twenty four financial results conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question Press Star one again.
Thank you I would now like to turn the call over to Josh Yankovich Investor Relations. Sir please begin.
Josh Yankovich: Thank you operator, good afternoon, everyone and thank you for joining us for our first quarter 2024 conference call.
Josh Yankovich: With me on the call today are Matt Flake, our CEO, David <unk>, our CFO, Jonathan price, our executive Vice President of strategy and emerging businesses <unk>, Our president who 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 expectations for the future operating and financial performance of Q2 Holdings, Inc. 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 quarterly report on Form 10-Q for the first quarter of 2024 and subsequent filings and the press release distributed this afternoon regarding the financial results we will discuss.
Josh Yankovich: Today.
Josh Yankovich: Forward looking statements that we make on this call are based on assumptions only as of the date discussed investors should not assume that these statements will remain operative at a later time and we undertake no obligation to update any such forward looking statements discussed in this call.
Josh Yankovich: Also unless otherwise stated all financial measures discussed on this call will be on a non-GAAP basis for 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: We have also published additional materials related to today's results on our Investor Relations website.
Josh Yankovich: Let me now turn the call over to Matt.
Matthew P. Flake: Thanks, Josh I'll start today's call by sharing our first quarter results and highlights from across the business I will then hand, it over to Jonathan to discuss our strategy and emerging businesses.
Matthew P. Flake: David will then discuss our financial results and guidance in more detail.
Matthew P. Flake: Our financial results in the quarter outperformed our expectations getting us off to a strong start towards our long term financial targets, we shared in February and.
Matthew P. Flake: In the first quarter, we generated a total non-GAAP revenue of $165 5 million above the high end of our guidance. We also continue to deliver on our commitment to improved profitability in the quarter with adjusted EBITDA of $25 2 million also above the high end of our guidance.
Matthew P. Flake: And for the first time, we generated positive free cash flow for the first quarter of a year, a total of $6 million demonstrating continued improvement in our financial profile.
Matthew P. Flake: In addition to our solid financial results, we continued to see strong demand in the first quarter with notable activity across net new expansion and renewables.
Matthew P. Flake: Find the broad mix of deals across asset tiers highlighted by a greater number of total tier two and three deals compared to any quarter last year as well as for tier one digital banking deals in the quarter, two net new and two that were meaningful expansions.
Matthew P. Flake: Our single platform value proposition with a common theme across all four of these tier one digital banking wins.
Matthew P. Flake: On the net new side, we want an opportunity with a $20 billion bank that will consolidate from multiple disparate incumbent digital banking solutions and used Q2 for retail small business and commercial.
Matthew P. Flake: The second tier one win was a retail digital banking deal with a $10 billion bank demonstrating that our platform remains highly differentiated even in significant retail only opportunities like this.
Matthew P. Flake: And because of our single platform value proposition, we expect to compete for the commercial business over time.
Matthew P. Flake: On the expansion side, we had significant wins with two existing tier one customers that started with one component of the platform either retail or commercial and purchased the other during the quarter. These deals represent just how valuable our expansion opportunities can be with one of them more than doubling the expected revenue.
Matthew P. Flake: Contribution from that customer.
Matthew P. Flake: I want to take this opportunity to talk about the unique position Q2 again for continued expansion with our customers and why wins like the two I just mentioned are playing an increasingly important role in our bookings performance.
Matthew P. Flake: Starting with our first line of code 20 years ago, we built a true single platform for retail small business and commercial today.
Matthew P. Flake: Today. This approach remains tremendously valuable to our customers for a few reasons.
Matthew P. Flake: It makes our customers more competitive by upgrading them to our best of breed solution, while unifying the user experience across the customer segments and devices.
Matthew P. Flake: And because they can add features from across the platform and let them grow with their account holders. So if a retail end user now requires business functionality. They can provide it without having to move them to a different system with a different login and experience.
Matthew P. Flake: It also helps our customers with vendor consolidation, allowing them to operate more efficiently and moving to a single platform. They can consolidate from multiple systems and vendors down to one and used one set of code to rollout new capabilities.
Matthew P. Flake: And finally, it helps innovation occur faster centralizing, our customers' data and integrations, making it easier to maintain to take upgrades and to add new products and services key elements of our product portfolio, such as Q2 innovation studio and our artificial intelligence capabilities are enhanced because we have this unified platform.
Matthew P. Flake: And for Q2, we believe our single platform drives competitive advantage by improving our ability to land and expand.
Matthew P. Flake: Due to the various legacy systems that financial institutions, often rely on our customers frequently start with one major product set from us.
Matthew P. Flake: But once they are converted to Q2, it becomes easier to add product sets through the expansion of our platform.
Matthew P. Flake: One of our tier one expansion from the quarter as a particularly good example of this an $8 billion five bank holding company that originally adopted our commercial digital banking solutions will now add a retail solution to their platform. In addition to the improved user experience associated with a single platform the customer will also.
Matthew P. Flake: Operational efficiencies by consolidating from five separate bank instances to serve the retail users into a single instance for both lines of business and when you pair our platform with the breadth and strength of our customer base. We believe our expansion opportunity only becomes greater we have approximately 4500 total customers.
Matthew P. Flake: <unk>.
Matthew P. Flake: And to put our expansion potential into perspective, I'll illustrate the opportunity we have within our tier one customer base alone we.
Matthew P. Flake: We have 90 tier one customers that are using the digital banking platform and less than half of them are using both retail and commercial solutions.
Matthew P. Flake: On top of that we have another 130 tier one customers who are not using our digital banking platform.
Matthew P. Flake: A portion of our customer base that we believe present, great expansion opportunity as well.
Matthew P. Flake: So while our net new sales performance has been strong and we're optimistic about our pipeline through the remainder of the year. We anticipate this expansion dynamic to continue playing a key role in our overall bookings performance going forward.
Matthew P. Flake: Outside of digital banking, our centrex risk and fraud and relationship pricing teams continue to drive notable sales activity for the business.
Matthew P. Flake: We had two significant tier one relationship pricing renewals in the quarter and on the centric side no matter whats happening in the economic environment fraud remains top of mind for our customer centric.
Matthew P. Flake: Centric products, which help them manage risk and compliance, particularly in the commercial banking space are regularly among our top cross sell products and in Q1, we saw over 50% growth in centric expansion bookings year over year.
Matthew P. Flake: So in summarizing the quarter I'd reiterate the strength of our financial performance, which outpaced our guidance in terms of revenue and profitability.
Matthew P. Flake: Our continued momentum on the net new side with the demand environment that we believe remains strong as we look at the rest of 2024.
Matthew P. Flake: And a single platform with a broad diverse customer base that puts us in a unique position to expand our existing relationships as a complement to our net new sales execution with that I'll hand, the call over to Jonathan to cover some updates from across our emerging businesses, where Q2 innovation studio and helix are also playing a crucial role in deepening our.
Jonathan Price: Customer relationships.
Jonathan Price: Thanks, Matt I'll start with Q2 innovation studio.
Jonathan Price: As Matt mentioned, the Fintech partner ecosystem, we felt through innovation studio has become a critical part of our story whether in winning net new deals where it was a key driver in every net new win in the quarter or in terms of expansion, where it's helping our customers unlock new business outcomes and in turn strengthening our existing partnerships and waste.
Matthew P. Flake: Echo far deeper than a typical incremental product expansion.
Matthew P. Flake: I'll share a quick customer story to demonstrate this dynamic.
Matthew P. Flake: We are a tier one bank that's been a Q2 customer for over 10 years and like many financial institutions. Today. They are laser focused on acquiring a new generation of customers.
Matthew P. Flake: <unk> believes embedding best in class Fintech partners will be a key part of that strategy and they are using Q2 innovation studio to rapidly deploy partner solutions integrated into their Q2 digital banking platform that will help them create a better user experience reduce friction and meet the next generation of customers where they are.
Matthew P. Flake: One partner or the bank has deployed provides a digital customer support platform, providing AI powered self service and virtual chat capabilities, along with the ability to offer real time dedicated banking guidance much like a traditional bank or what in the branch right inside the digital banking experience.
Matthew P. Flake: The rollout of this partner has had a significant impact for the bank.
Matthew P. Flake: Customer adoption has been incredible with minimal marketing on the bank's part more than 20000 of their customers are using the new solution. Those customers are now resolving a majority of their typical customer support issues using the virtual chat, which does have a direct correlation with our reduction in call center volumes.
Matthew P. Flake: These gains have enabled the bank to rethink how they allocate their customer support functions, reducing time spent in their traditional call center and increasingly focusing our digital support and more strategic areas of their business.
Matthew P. Flake: And this is just one of many Fintech partners tobaccos locks to sharpen their value proposition and deepen digital engagement with their customers both on the retail and commercial side.
Matthew P. Flake: For example, <unk> multiple partners to provide commercial payment capabilities and have achieved more than a 40% growth in payments volume processed by these solutions when comparing first quarter of 2024 with the prior year period.
Matthew P. Flake: Maybe it's another fintech partner to drive approximately 130% growth in the international FX payments over the last 12 months, which is a critical offering and recruiting new commercial customers that also drives revenue for the bank.
Matthew P. Flake: And beyond the customer experience the overall impact to their business is impressive to through revenue share and cost efficiencies, they offset approximately 50% of their total digital banking cost in 2023.
Matthew P. Flake: When you consider stories like this it's easy to see how innovation studio helps drive renewal and expansion activity. It allows our customers to rapidly deploy best in class Fintech solutions from a marketplace of more than 160 partners and helps them drive deeper engagement across a broader product suite and it has the potential to offset the cost of their.
Matthew P. Flake: <unk> investment with us overtime.
Matthew P. Flake: Shifting gears to helix, we have some quality wins in the quarter, including a net new fintech win and a meaningful program launch that I'll expand on briefly.
Matthew P. Flake: In our February call, we mentioned a fintech win that was a competitive takeaway and in the first quarter. Just a few months later, we successfully converted and launched that customers users on the helix platform. We are very pleased with the speed of this launch not only does it demonstrate the flexibility and strength of the helix technology.
Matthew P. Flake: But also our team's ability to successfully launch programs and more specifically conversions off another platform.
Matthew P. Flake: Our successful launch with this customer is a particularly useful proof point for us in the market as the current backdrop continues to put pressure on the broader banking as a service landscape.
Matthew P. Flake: Additionally, this customer is the first philosophy with a bank of record partner that we announced in the third quarter of last year.
Matthew P. Flake: It means we were able to stand up the helix platform successfully launch its first program and start bringing revenue to the bank and roughly six months about half the time it took us historically.
Matthew P. Flake: As we continue to increase our focus on taking helix to financial institutions, we believe that our ability to configure and deploy the helix platform quickly and seamlessly alongside our bank's existing technology stack will be an important differentiator for us.
Matthew P. Flake: With that I'll hand, the call over to David to discuss our financial results from the quarter.
David: Thanks, Jonathan we started 2024 with a strong quarter bookings drove meaningful subscription <unk>.
David: And backlog growth.
David: We delivered revenue and adjusted EBITDA results above the high end of our guidance and for the first time in company history, we generated positive free cash flow in the first quarter of the year, despite normal seasonal cash flow headwinds.
David: I will now discuss our financial results in more detail and conclude with our updated guidance for our second quarter and full year of 2024.
Matthew P. Flake: Revenue for the first quarter was 165 $5 million, an increase of 8% year over year.
Matthew P. Flake: And up 2% sequentially.
Matthew P. Flake: Our total revenue growth was primarily from subscription based revenues, which grew 13% year over year and 4% sequentially. The.
Matthew P. Flake: The year over year and sequential growth was driven by new customer go lives strong expansion sales with existing customers as well as improved renewal economics.
Matthew P. Flake: Typically these expansion sales have a quicker time to revenue and are accretive to gross margin.
Matthew P. Flake: The stronger renewal performance, we are seeing is a continuation of the renewal strength, we saw in the second half of last year.
Matthew P. Flake: As we more effectively capture the value, we deliver to our customers and extend the contract duration.
Matthew P. Flake: As expected our services and other revenue declined both sequentially and year over year, driven by continued pressure on the size and scope of our professional service engagements, which are more discretionary in nature.
Matthew P. Flake: We do expect the magnitude of the year over year decline in services to improve throughout the year, but as mentioned previously we continue to expect to see contraction going forward in this lower margin revenue stream due to the macroeconomic factors and financial pressures our customers are facing.
Matthew P. Flake: Transactional revenue increased by 5% year over year, and 7% sequentially largely driven by helix based revenues associated with higher seasonal usage.
Matthew P. Flake: Total annualized recurring revenue or total IRR grew to $761 million up 13% year over year from $672 $7 million at the end of the first quarter of 2023 are.
Matthew P. Flake: Our subscription.
Matthew P. Flake: <unk> grew to $615 1 million.
Matthew P. Flake: Up 18% year over year from $521 3 million in the prior year period.
Matthew P. Flake: Our year over year subscription growth was positively impacted by net new renewal and expansion base bookings with total AOR growth, partially offset by a decline in professional services revenue.
Matthew P. Flake: Our ending backlog of approximately $1 9 billion.
Matthew P. Flake: Increased $83 million sequentially or 5%.
Matthew P. Flake: And $387 million year over year, or 25%, which is the largest year over year dollar increase in company history, and the highest year over year growth rate, we've seen in over three years.
Matthew P. Flake: The year over year and sequential increases were partially driven by renewals as well as expansion bookings as our customers added new solutions and extended contract durations.
Matthew P. Flake: In addition, our year over year growth was positively impacted by consistently strong net new bookings performance over the last 12 months.
Matthew P. Flake: As we mentioned previously the sequential change in backlog may fluctuate quarter to quarter based on the number of renewal opportunities available within a given quarter.
Matthew P. Flake: Gross margins were 54, 9% for the first quarter up from 54% in the prior year period and down from 56% in the previous quarter.
Matthew P. Flake: The year over year increase in gross margin was driven by an increasing mix of higher margin subscription based revenues.
Matthew P. Flake: And increased efficiencies within our delivery and support functions. This.
Matthew P. Flake: Sequential change in our gross margin reflects the incremental implementation expenses recognized in the first quarter associated with the delivery of a high number of go lives, which were more than in any single quarter in 2023.
Matthew P. Flake: Sequential margins were also impacted by a seasonal increase in payroll taxes, and 401K matching expenses due to the timing of annual bonus payments and the reset of taxes and 401K matching eligibility.
Matthew P. Flake: Looking ahead, we anticipate continued year over year improvements in gross margin for each subsequent quarter and the full year.
Matthew P. Flake: Total operating expenses for the first quarter were $72 8 million or <unk>, 44% of revenue.
Matthew P. Flake: Compared to $72 $5 million.
Matthew P. Flake: Our 47, 4% of revenue in the first quarter of 2023, and $74 8 million or 46, 1% of revenue in the fourth quarter of 2023.
Matthew P. Flake: The year over year and sequential reduction in operating expenses as a percent of revenue was driven primarily by better scaling of sales and marketing expenses relative to revenue as we continue to drive improvement in our cost of acquiring new revenue, which is partially attributable to lower costs associated with expansion bookings.
Matthew P. Flake: The sequential decline was impacted by approximately $1 million based on the seasonality of customer events, which are more pronounced in the fourth quarter.
Matthew P. Flake: As a reminder, in the second quarter, we will be hosting our customers and prospects at Q2 connect our annual conference, which will have an approximate $1 $5 million impact sequentially on sales and marketing expense.
Matthew P. Flake: Total adjusted EBITDA was a record $25 2 million up from $16 5 million in the prior year period, and $23 $2 million in the previous quarter.
Matthew P. Flake: We ended the year with cash cash equivalents and investments of $338 5 million up from $324 million at the end of the previous quarter.
Matthew P. Flake: We generated cash flow from operations in the first quarter of $13 $4 million.
Matthew P. Flake: Driven by improved profitability and continued effective working capital management for.
Matthew P. Flake: For the quarter, we also generated free cash flow of $6 million, marking a breakthrough from the historical pattern of negative free cash flow during our first calendar quarter, which carries seasonally higher cash costs associated with our annual bonus.
Matthew P. Flake: And end of year Commission payouts.
Matthew P. Flake: As we mentioned previously we continue to expect free cash flow as a percentage of adjusted EBITDA to be over 60% in 2024 with a target of continued expansion thereafter.
Speaker Change: Let me wrap up by sharing our second quarter and full year 2024 guidance.
Speaker Change: We forecast second quarter non-GAAP revenue in the range of $169 million to $172 million and full year non-GAAP revenue in the range of $686 million to $692 million.
Speaker Change: Representing year over year growth of 10% to 11% for the full year.
Matthew P. Flake: We also anticipate subscription revenue growth for the full year to be at least 14%.
Matthew P. Flake: Above the initial outlook, we had six months ago, driven by better than expected expansion and renewals bookings as well as the organic growth we've seen to start the year.
Matthew P. Flake: We forecast second quarter, adjusted EBITDA of $26 million to $28 million.
Matthew P. Flake: And full year 2024, adjusted EBITDA of $110 million to $114 million representing.
Matthew P. Flake: Approximately 16% to 17% of non-GAAP revenue for the year.
Matthew P. Flake: In summary, we had a great start to the year building on the momentum coming out of 2023 with continued strong growth in subscription.
Matthew P. Flake: And revenue as well as adjusted EBITDA results above the high end of our guidance, our first quarter performance and projections for the remainder of the year gives us the confidence to lift our full year outlook and reiterate our expectation of hitting our rule of 30 target on a total revenue growth basis in the back half of the year.
Matthew P. Flake: And looking beyond this year with the continued progress on our profitable growth strategy, the quality of our pipeline and substantial opportunity afforded to us to continue to expand with our existing customers. We believe we are well positioned to continue executing towards the long term targets, we communicated last quarter.
Matthew P. Flake: With that I'll turn the call back over to Matt for his closing remarks.
Matthew P. Flake: Thanks, David I'll conclude by reiterating a few key takeaways from the quarter first we continued our sales momentum with a broad mix of net new and expansion wins.
Matthew P. Flake: Two tier one digital banking expansion wins from the quarter demonstrate the unique opportunity we have to deepen our existing relationships because of our single platform and large diverse customer base and given the strength of the demand environment. The state of our pipeline and our recent win rates, we're optimistic about the remainder of the year.
Matthew P. Flake: Our emerging businesses continued to execute well and we saw key sales and renewal contributions from our centric risk management and relationship pricing solutions as well and.
Matthew P. Flake: And finally, we delivered financial results that outperformed our expectations, while also achieving positive free cash flow for the first time in our first quarter. These results represent a promising start towards achieving the three year financial targets. We shared in February and underscore my confidence in the opportunities ahead of us. Thank you and I'll hand, it over to the operator for <unk>.
Matthew P. Flake: Questions.
Speaker Change: Began the question and answer session. If you have dialed in and we would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the team. If you would like to withdraw your question simply press Star. One again, we are called upon to ask your question and our listening via allowance.
Speaker Change: Peter on your device. Please pickup your handset and ensure that your phone is not on mute when asking a question.
Matthew P. Flake: Press Star one to join the team and your first question comes from the line of Alex Sklar. Please go ahead.
Alexander James Sklar: Great. Thank you Matt.
Alexander James Sklar: Matt just start with you I appreciate all the expansion opportunity commentary and the excitement around that I know a lot of your customers are proud and prospects are probably on multiyear contracts for some of the solutions. You are trying to expand with them on has anything changed in terms of their willingness to look at Q2 solutions earlier in their contract cycles and not worry about timing just given renewed them but.
Alexander James Sklar: Just around deposits and inefficiencies.
Alexander James Sklar: They can gain around a single platform.
Matthew P. Flake: Yes, Thanks, Alex.
Matthew P. Flake: Well the contract is for the SKU that they're running and so what happens, particularly in the larger deals as they.
Matthew P. Flake: By the retail solution. It takes a year to deliver we deliver we have a good experience and then they kind of get the team together on the commercial side or on precision lender or what are the larger skus and say, let's go look at this and to take advantage of all the stuff I talked about there about the single platform. So.
Matthew P. Flake: But the advantage to us as you have a master services agreement with them you had a good experience on the conversion. They begin to know how you work and they want to do the expansion with us and so thats really why we highlighted that in the call which is we talked about.
Alexander James Sklar: 220 customers that are greater than $5 billion in assets and.
Alexander James Sklar: 40% of them early running one of our large skus.
Alexander James Sklar: They can go buy any of these products at a time, it's more about capacity that they have to project manage and be organization ready to go do it. So it's a tremendous opportunity and I. Appreciate you asked the question because we wanted to make sure that we are.
Alexander James Sklar: Articulated it.
Alexander James Sklar: <unk> shareholders.
Speaker Change: Okay great.
Speaker Change: And David just maybe a two part question for you last quarter, you kind of called out the largest delta between booked and implemented IRR that you've had in some time. This was another quarter past can you update us on the visibility of getting at are alive, and then second part here just given the comments that some of these expansion bookings and faster time to revenue is there any change.
Speaker Change: That we should think about in terms of percentage of your bookings on average that can impact revenue kind of in year pass through.
Speaker Change: Thanks.
David: Yeah, sure, Alex and I will take the first one.
David: And then move onto the second on the IRR not lives. So last quarter. If you remember one of the things that we.
David: We conveyed and we sort of gave this within the context of the overall IRR commentary was that 18% of that was alive that number is now down to 15%.
David: But two things to keep in mind. The first one is Q4 was a record bookings quarter and we talked a lot about the momentum that continues into Q1, but Q4 is seasonally large and that's part of the reason why you saw so much of that in our lives. The second part of that is that 15% number is still the second highest we've seen in years.
Speaker Change: We're still at a really high percentage of our overall.
Speaker Change: Base that is not in the ground yet so that's great news for us in terms of visibility is great news for us in terms of.
Speaker Change: What we've already told you in terms of those long term projections.
Speaker Change: The second question I think was around what percentage of our bookings do we see current year on the easiest way to think about that as with net new sort of bifurcate net new and cross our expansion on the net new side anything that we do going forward to the rest of the year, you're going to see very little revenue as you know the implementation cycles, depending on the size.
Speaker Change: The deal can be anywhere from nine to 15 months.
Speaker Change: Conversely on the cross or expansion side of things, we're seeing a lot of strength in the time to revenue for that is quicker, but you still do see let's say four to nine months, depending upon the types of expansion solution that we have so we will see some of that revenue.
Speaker Change: But the majority of it is going to come in the second half of the year. The one that we do see immediate time to revenue as some of the expansion opportunity. We have specific licenses for our solutions. So there is an immediate recognition for some of that and we did see strength quite frankly in Q1 and thats part of the revenue upside that you saw and what we delivered.
Speaker Change: Okay. That's great color. Thank you both congrats on the quarter.
Speaker Change: Thanks.
Speaker Change: Your next question comes from Terry Tillman. Please go ahead.
Terrell Frederick Tillman: Yes, Hey, Congrats from me as well I'll keep it to two questions. The first question is I like all the color in terms of the $3 billion or our opportunity in the 90 to 130 I don't know if this is for you, Matt or whoever else, but I wanted to probe on the 90 tier ones I think they are only using one of your two digital banking sides of the house.
Speaker Change: And then the 130 tier ones that actually don't use any digital banking.
Speaker Change: Look out of your pipeline and how you got your go to market kind of.
Speaker Change: Targeting whats of those two that seems the most kind of actionable near term again, the 90 or 130 kind of curious any kind of commentary you could share on that and then I had a follow up for Jonathan.
Speaker Change: Yes, Terry I would say, the 90 or probably because they are using either retail or commercial banking with us and so.
Speaker Change: They are using the platform and what we're really seeing right now as I talked about.
Speaker Change: In the script is that the banks are trying to find efficiencies and they are trying to find a better digital experience and when you are running our retail product and you want to add commercial you don't have to implement a whole new system you have to learn a new back office you don't have to do new hooks into the core check imaging statement imaging.
Speaker Change: <unk>.
Speaker Change: Systems, they're at about on demand and turning on those features and converting the customers over so there's a tremendous amount of efficiency that.
Speaker Change: At the bank or credit Union gets from turning on those and so those are the ones, where we're seeing a tremendous amount of demand. If you look at the two of the commercials of two of the tier ones that we signed that were cross sells one added retail and one added commercial so all of those are what I would say the opportunities are but that doesn't mean that we're not calling on the 130 to cross sell retail small business corporate <unk>.
Speaker Change: Lender fraud products.
Speaker Change: Theres, just a lot of opportunity there and we.
Speaker Change: We have a customer base I don't know if you saw it or not but the top 100, Forbes banks were announced a couple of week or so ago 58 of those are Q2 customers.
Speaker Change: Well, we have a really solid customer base I think we have the premier customer base in North America for.
Speaker Change: Financial institutions, and 58 of the top hundred Forbes customers use our technology. So there's a tremendous opportunity there and we haven't we have a really strong customer base to go cross sell into or obviously excited about the opportunities.
Speaker Change: That's great Matt Thanks for that and I guess, maybe Jonathan on the innovation studio the antidote about the one customer.
Jonathan Price: Kind of getting over 50% of the contracted platform kind of almost making it up through the fees and just what they can do for their business I am curious, though you have a 160 plus partners it seems like and you're continuing to expand it.
Jonathan Price: How are you getting monetization because it seems like you are providing value for both your end customer, but then also the partners. So anything you can quantify on an innovation studio monetization or how to think about it over the next couple of years. Thanks again.
Speaker Change: Yes, Thanks, Terry Yes, the way I think about it is weather.
Speaker Change: Whether it's in the accelerator program more of the marketplace, we strike a revenue share with each of the partners for any deal. They do in the marketplace, we share in that revenue with the financial institution and so if you think about from the partners lands. They are accessing our channel of.
Speaker Change: 450, plus financial institutions that are alive on digital banking today 23 million end users.
Speaker Change: On that platform that log in 5 billion times, a year, so they're getting access to a pretty compelling channel with one integration to go deliver their solution and for them. The alternative of going one to one across the <unk> landscape in the U S is a pretty daunting task and so they really do value the channel and we have partners, where we represent a meaningful component.
Speaker Change: <unk> of their revenue as they scale across us and other channel partners. So it's certainly a valuable economic opportunity for the partner and for the <unk>. Obviously that story, we told upfront in the call certainly talks to what we're starting to see in terms of the economic and strategic value to them and then obviously our revenue share I mentioned already.
Speaker Change: So we're excited about it it's continuing to grow in strategic impact on an economic value for all three of those constituents.
Speaker Change: Great. Thank you.
Speaker Change: Thanks, Eric Sir.
Speaker Change: Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Speaker Change: And the next question comes from the line of Adam Hotchkiss. Please go ahead.
Adam R. Hotchkiss: Great. Thanks for taking my questions, Matt I'd be curious, how you think about the breadth of the platform as it stands today.
Adam R. Hotchkiss: Clearly an expansion opportunity within the existing base that you mentioned in Q2 innovation studio, obviously add to that but now that you are generating much more meaningful cash flow are there any obvious areas customers are asking for that you would look to invest in more deeply either organically or inorganically.
Speaker Change: Yes, Adam.
Adam: I'd say were still early in the <unk> and the <unk>.
Adam: This digital transformation, which is basically taking any human experience.
Speaker Change: Human interactions you have with the financial institution and digitizing it.
Speaker Change: And then.
Speaker Change: Data AI, how are we going to appear.
Speaker Change: Approach that if all of these things are things that we're diving into but for US user experience is critical and then you move through the commercial functionality dynamic personalization.
Speaker Change: We have talked about multiple times fraud is.
Speaker Change: It had gone through the roof. This it was what it was a large regional bank almost had the name CEO mentioned that he's accounting for $30 million of check fraud, a quarter for the foreseeable future for the next couple of quarters check fraud back in so that productivity.
Speaker Change: Was.
Speaker Change: One of our top cross sells in the year.
Speaker Change: For our fraud solutions.
Speaker Change: I'm going to have Kirk talk a little bit about what we're doing with AI, but also the other thing to think about and Terry talked about the second dose is.
Speaker Change: Innovation studio, we have 160 partners that we can go and cross sell to solve problems. So I don't have to go into this and I want to go invest in all of these different smaller solutions that can partner with people and get a piece of the revenue solve the customer's problem.
Speaker Change: And provide them with the best solution.
Speaker Change: It really is scaled I think 100% of the deals in the quarter had innovation studio attached to them.
Speaker Change: So tremendous growth and innovations to your bookings in the first quarter. So we're going to continue to invest in user experience commercial banking fraud.
Speaker Change: Data <unk>.
Speaker Change: <unk> for a second curve you can talk about.
Speaker Change: And how we are thinking about that because it's such a big initiative for us in the company.
Speaker Change: Yes, I'll do it quickly I mean, we're really excited about the future and what thats going to bring to us and our customers. We really think about it in three big buckets. There is internal use of it how do we become more efficient for our own good right. How do we embedded in our existing products and then obviously what are the <unk>.
Speaker Change: Under the new products that we might be developing there is an important fourth bucket, though in that Jonathan alluded to in a second go which is innovation studio where we have.
Speaker Change: All of these.
Speaker Change: The Tech partners that are also going to be building AI solutions into their into their offerings and already we see that in four categories and digital customer support and fraud, and marketing and targeting and also in insights and financial wellness and so thats already.
Speaker Change: Not just in the pipeline, but in the solutions that we offer through innovation studio and if you just step back a little bit and think about.
Speaker Change: In addition to the gigantic amount of digital banking data that we have in the millions of customers and users that logon every single day over $5 billion a year. We also have in our relationship pricing.
Speaker Change: The largest what we think is the largest loan commercial loan book in the world of data set in the world and the largest commercial deposit data set in the world and that is highly structured data already because of the way that it's used by our customers every day. So we think that all leads to a lot of crossover.
Speaker Change: In terms of some of the solutions that we already have in market and what we could do there but also in terms of.
Speaker Change: Some of the products that will deliver in the future.
Speaker Change: Okay, Great. That's really useful thanks for that and then and then David I appreciate the commentary on <unk> and some of the Lumpiness that can happen there quarter to quarter could you just remind us what the rest of 2024 looks like from a renewal.
David: <unk> perspective may be versus the same period last year, just trying to get a better sense for how we should think about the <unk> pumps as we as we head through the year based on your visibility into renewals I appreciate it.
David: Yes sure Adam.
David: This year is not going to be different than most years past, where we're going to see most of our renewals come into scope in Q4, So that's going to give us the biggest opportunity for renewals.
David: We did see good renewal strength in Q1.
David: And as we sort of look through the year. The one quarter that is relatively pressured from a renewal standpoint as Q3.
David: So we have.
David: We have good renewals in scope for the remainder of the year with Q3 being the most pressured Q4 being the quarter with the most opportunity.
Speaker Change: Great. Thanks for taking the questions.
Speaker Change: Thanks, Ed.
Speaker Change: Your next question comes from the line of Matt Zhang. Please go ahead.
Matthew David VanVliet: But on the 90 banks that are using.
Matthew David VanVliet: Other commercial retail, but not the other.
Matthew David VanVliet: Do you have much of a sense of what the mixes that are using something somewhat modern that's not just kind of the off the shelf from the core.
Matthew David VanVliet: That might be a little bit more of a difficult.
Speaker Change: Displacement or thought otherwise, maybe what's the opportunity of something that's not modern and should be an easier win.
Speaker Change: I don't have that off the top of my head I will tell you that what they what they certainly don't have is a single platform that I talked about earlier, which is they're running a separate system that requires separate upgrade separate back office administration separate set of interfaces separate user experience and so when they move to us they they unify that experience.
Speaker Change: Both for the customer that unified for the bank employee and the unify at FERC.
Speaker Change: Provider, which has us in this case and we can upgrade the software faster given.
Speaker Change: The data is all unifies wells, which is what Kirk was talking about the importance of having that clean data. So.
Speaker Change: The quality of the system, obviously with our win rates and the deals we're doing I would argue we have the premier solution in the marketplace or whatever we're competing against is not going to have that its more about the inertia to get them to be able to go through the conversion process and can we prioritize that and as we've talked about with the focus right now, it's about acquiring retaining and growing deposits and <unk>.
Speaker Change: Driving efficiencies to the business our systems are clearly coming up is the priority for these financial institutions to convert to and Thats why youre seeing the demand environment that we've seen over the last couple of quarters and in the first quarter.
Speaker Change: Alright, very helpful. And then David when you look at kind of what the growth outlook.
David: As in the pipeline over the next couple of years, it seems pretty robust and you're talking about.
David: Pretty big backlog of <unk> not yet.
David: <unk>.
David: Where do you stand out in terms of head count investments, whether it's around the implementation teams or the go to market team.
Speaker Change: Where are we at in terms of the team that's on the field now ready to capture all of the opportunity versus needing to add head count and then sort of wrapped in that any any change in philosophy around using outside partners for some of the blocking and tackling type situations on the implementations.
Speaker Change: Hey, Matt first first and foremost I think we still feel strongly about our ability to scale our costs relative to revenue growth. So full stop on that.
Matt: Having said that Unimplemented <unk>. That's certainly one that we are going to continue to invest in head count there while investing in efficiencies, we're doing things more efficiently with our customers. We are utilizing our global resources more effectively to lower the overall cost of an average implementation, but we still have to add resources given all the momentum we have.
Matt: Seen on the booking side of things sales and marketing, we've gotten a lot more efficient there as well and I talked in the prepared remarks about our ability from a CAC standpoint to continue to get much more efficient and we think we have more opportunities for efficiency and that doesn't mean, we don't have to add some resources as we continue to grow the number of accounts that were supporting.
Speaker Change: Matt talked a lot about the expansion opportunity in the call earlier, we need to have resources that are able to reach out and work with those customers to identify those opportunities and ultimately book them.
Speaker Change: Utilizing partners more effectively.
Speaker Change: We're constantly looking at ways to get more efficient partner utilization could be one of those it's not something that were <unk>.
Speaker Change: Two as of yet, but there are certain thats certainly one of the efficiency drivers that we're exploring going forward to improve the cost structure relative to the revenue that we're driving from a delivery standpoint.
Speaker Change: Great. Thank you.
Speaker Change: Thanks, Matt Thanks, Matt.
Speaker Change: Your next question comes from the line of Andrew Schmidt. Please go ahead.
Andrew Schmidt: Hey, guys. Thanks for taking my questions good results here.
Andrew Schmidt: Apologies I jumped on a little late.
Andrew Schmidt: Sorry, if this has been asked but could you talk a little bit more about what's driving the tier two resurgence really good to see.
Andrew Schmidt: Obviously, there's probably.
Andrew Schmidt: From developments environmental things going on but if you could talk about what's going on.
Andrew Schmidt: T.
Andrew Schmidt: That size of EFI that'd be helpful. Thanks, a lot.
Speaker Change: Yes, Andrew I think to some extent.
Speaker Change: We had solid tier two tier three performance last year. It was maybe a little overshadowed by some of the.
Speaker Change: The larger tier ones, we got we had a solid.
Speaker Change: Quarter quarter over quarter, with the tier twos and tier three last year.
Speaker Change: But the performance I would I would say is a lot of these financial institutions and just the time, where they are or the pipe coming up but we have been building on the momentum that we have.
Speaker Change: The momentum we have with them has been building and so they have the same challenges that the larger banks do it's just a matter of.
Speaker Change: Our solution for them, it's a little bit bigger of a decision as I was talking earlier, the larger wants to do retail or retail or commercial or small business. These guys usually take the entire platform. So the conversion for them is converting retail customer small business customers and commercial customers. So it's a little bit it takes a little more time for them to get organized make that decision.
Speaker Change: But we signed more tier twos and tier three this quarter than we've done in any quarter last year and there is.
Speaker Change: What they are beginning to realize that not only do they have the advantage of being local their rates are going to be just as competitive as the big four but they are able to work out there and use our technology as a way to compete with bank of America Wells Chase and Citi and their products that were hearing stories about wins, taking large accounts from them, whether it's municipalities health care system.
Speaker Change: <unk>.
Speaker Change: Larger companies and they have gone out and taken up this business because they have those advantages being local being there to solve the problem for them and also being competitive on rates. So I think it's just a matter of.
Speaker Change: They have to become more efficient and technology is going to be how they're going to compete and take a look at the systems and we're the only single platform out there we have more customers running on our commercial solutions, which work on mobile phones and tablets and desktops and that's what you have to do to win the business and so that's what's driving the demand environment, it's about acquiring retaining and growing deposits and we've shifted from a lending.
Speaker Change: <unk> to get the deposits.
Speaker Change: We've been in this business for nearly 20 years in August and have a great reputation of taking care of our customers and building great products and being there for them and so that's that's ultimately what's driving the demand.
Speaker Change: Got it well said thank you Matt.
Speaker Change: Commercial platform certainly a differentiator.
Speaker Change: Could you just touch on the pipeline for a second I think a quarter ago.
Speaker Change: It seemed like the.
Speaker Change: The pipeline was a little bit more balanced from a size perspective versus last year and to some extent I think we see that coming through here, but maybe you could talk about the composition is that still the case.
Speaker Change: You hit the key is from an evenly balanced perspectives that imply more visibility in terms of.
Speaker Change: Timing of deal close in bookings and things like that versus maybe these larger wins that can be longer and have more uncertainty. Thanks, a lot guys.
Speaker Change: Yes, I would say it was probably out of balance last year with the size of the deals we did in the back half of the year, Andrew I mean, it was steady Eddy in that tier two three and then this quarter like I don't know October we signed four tier ones in the quarter. So.
Speaker Change: It was still a great quarter, but the tier two tier three makeup and you got to remember a $4 billion banks not that different than the $8 billion bank from an economic perspective so.
Speaker Change: Yes, I mean, I think I think.
Speaker Change: David can comment on whether we're going to see <unk> go live faster, but like I said earlier.
Speaker Change: <unk> that do on a retail small business and corporate conversion that the four $5 billion bank could end up being a nine or 12 months ago, a lot, but I think that youll see with the expansion. Some of this stuff come into revenue, we're seeing things come to revenue a little quicker been happy with the results. So far I don't want to get ahead of us.
Speaker Change: And a guide David looks at me funny, when I do that but I think we have a lot of opportunity to.
Speaker Change: And in the pipe as well as in that tier two space and tier three to win deals and get them live a little faster than.
Speaker Change: The largest deal in the history of the company that we signed last quarter.
Speaker Change: Big Bank for precision lender that we signed last year. So.
Speaker Change: It should come to revenue first for Deb you want to comment on that at all yes look there's there's maybe one or two months for some of these deals that we'll see at the end of this year in terms of revenue recognition, but for the most part the majority of this revenue is going to start coming through starting next year.
Speaker Change: And as I said.
Deb: And I don't know if youre on yet Andrew I know you said you joined a little late but we did talk a little bit earlier about sort of the shape of the bookings and how we see some of that manifest of revenue, particularly on the cross side. So some of the cross bookings or expansion bookings that we have we will see some revenue later in the year for those and again, we were expecting some of that coming into the year and then we have some immediate time to revenue like license.
Speaker Change: Expansion, where we sit saw a lot of strength during the course of the quarter, Matt mentioned the growth in centric, specifically, but thats one of those areas, where we get fairly immediate revenue recognition on that so feel good about the mix of expansion as well as net new and most of that net new youre going to see coming online in 'twenty five.
Speaker Change: Got it. Thank you very much I appreciate the comments thanks Andrea.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
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