Q2 Holdings, Inc. (QTWO) Q4 2016 Earnings Report, Transcript and Summary

Good morning. My name is Karol, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings’ Fourth Quarter 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. [Operator Instructions] At this time I would like to turn the call over to Bob Gujavarty.

Welcome to the Q2 Holdings’ conference call for the fourth quarter and year-ended December 31, 2016. I am Bob Gujavarty, Vice President of Investor Relations. And with me today on the call are Matt Flake, our CEO; and Jennifer Harris, our CFO. As a reminder, today’s conference call is being broadcast live via webcast. In addition, a replay of the call will be available on our website following the call. By now, you should have received a copy of our press release that was distributed yesterday afternoon. If you have not, it is available on the Investor Relations section of our website. Let me also highlight our participation in several investor events this quarter. We will be attending the Raymond James Institutional Investor Conference in Orlando and the Pacific Crest Emerging Technology Summit in San Francisco. Before beginning, we must caution you that today’s remarks in this discussion, including statements made during the question-and-answer session, contain forward-looking statements. These statements are subject to numerous important factors, risks, and uncertainties which could cause actual results to differ from the results implied by these or other forward-looking statements. Also, these statements are based solely on the present information, and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission and the risk factors contained therein, and other disclosures. We do not undertake any duty to update any forward-looking statements. During this call, we’ll be referring to both GAAP and non-GAAP financial measures. We believe that non-GAAP measures are representative of how we internally measure the business. And they’re reconciled to GAAP in the tables attached to our press release, which is available on our Investor Relations website. The non-revenue financial measures we’ll discuss today are non-GAAP, unless we state the measure as a GAAP number. Any non-GAAP outlook we provide has not been reconciled to the comparable GAAP outlook because, among other things, we cannot reliably estimate our future stock-based compensation expense, which is dependent on our future stock price. Since we expect our future stock-based compensation expense to have a significant impact on our future GAAP financial results, a reconciliation is non-available on a forward-looking basis without unreasonable effort. Let me now turn the call over to Matt Flake.

Thanks Bob and thanks to all of you for joining us on our fourth quarter and full year 2016 earnings call. Today I’ll share some financial and business highlights from the fourth quarter and full year 2016. I’ll than the turn the call over to Jennifer to provide a more detailed look at our 2016 financial results and guidance for the first quarter and full year 2017. We ended the year with a strong fourth quarter generating revenue of $42.2 million, up 39% year-over-year. Revenue for the full year was $150.2 million, up 38% year-over-year. We also added approximately 800,000 users in the quarter, ending the year with 8.6 million users on our platform, a 36% increase year-over-year. I’d like to kick-off today’s call by discussing our sales performance from the quarter, in which we had record setting net new activity and strong year-over-year cross-sales activity. In the first half of the year, we talked about some slowdowns in bank decision making, which we believe was brought on by uncertainties surrounding the economy and the 2016 presidential election. While this resulted in a handful of our bank deals, pushing out further into 2016, we hope to see our momentum picked back up in the back half of the year and in the fourth quarter. The sales team signed the most net new customers in a quarter since becoming a publicly traded company. In addition to the quantity of deals from the quarter, we added a great mix of bank and credit union customers, representing a variety of regions and tiers including two new Tier 1 banks, one in the Pacific Northwest, the other in the Northeast. The latter is a $13 billion bank, which chose Q2 single platform to replace their disparate consumer and business platforms provided by one of the large core processors. They have an equal focus on consumer and business markets and felt that Q2 platform position them to provide unified experience to their customers across devices and customer segments, as well as simplify their back office operations. In addition to the platform, the banks signed up for a number of ancillary products including Q2 Smart, our new behavioral analytics platform, which I referenced in previous calls. I alluded to a strong quarter on the cross-sales side as well, and I am proud to report that we signed a record number of contract extensions for a single quarter. In general, I view our sales execution in the fourth quarter in both net new and cross sale, as an indicator that the demand for new technology is alive and well amongst our customer base. And looking into 2017, I believe our customers are excited about the prospect of a more supportive macro and regulatory economic environment. The fourth quarter also put an exclamation point on a tremendous year of delivery execution from our implementations team. We had two Tier 1s go-live during the fourth quarter, which, along with the delivery of several Tier 2 and 3 customers, contributed to our user growth for the quarter. As I mentioned earlier, we added 800,000 registered users during the quarter, bringing our user growth from 2016 to a grand total of 2.3 million users. While this was a remarkable year for our delivery teams, I would like to point out that our looking forward 2017, we expect our end user growth to moderate due to the volume of business and corporate deals we signed this year, which generally result in fewer users added per customer, but higher average revenue per user. We have also had some recent developments on the product front, where we officially launch Q2 Smart, our new behavioral analytics platform, while it’s still early in the life span of this product, it received a positive reception from customers and prospects. We have more than 20 customers already signed up for Q2 Smart and it’s proving to be a competitive advantage in net new deals as well. Before handing the call over to Jennifer, I’d like to briefly reflect on the year we had in 2016, during which we had many great accomplishments across the organization. We succeeded in adding new customers and expanding relationships with existing customers, demonstrating that the digital transition is still taking hold in our market, and that our owned customers have an appetite to deepen their technology partnership with us. We had another year of meaningful product innovation, in which we continue to round out the functionality of the Q2 platform. Our corporate banking suite gained considerable momentum in the market, being adopted by new and existing customers and receiving recognition from industry analysts. We have also seen Q2 labs, our innovation focused product group, begin to gain traction in the market. And we expect some exciting news from this group in 2017. Finally, we continue to execute against our financial targets highlighted by our transition to positive adjusted EBITDA in the fourth quarter. With that I'll hand the call over to Jennifer to discuss our financial results in full detail.

Thanks, Matt. We are pleased to have delivered fourth quarter revenue that exceeded our guidance, combined with solid gross margin improvement and our first quarter of positive adjusted EBITDA. I will briefly review our results for the fourth quarter and full year 2016 before finishing with updated guidance for the first quarter and full year 2017. Total revenue for the fourth quarter was $42.2 million, an increase of 39% year-over-year and up 10% from the previous quarter. Revenue for the full year 2016 was $150.2 million, up 38% year-over-year. Our increased revenue in the fourth quarter was principally the result of strong growth in subscription and services revenue. Subscription and services revenue benefited from new customer go lives in the quarter including the two Tier 1 customers Matt referenced earlier. Services revenue also benefited from the conversion of the last sterling users to output [ph] instance on our platform. Transaction based revenue increased in actual dollars and represented 17% of total revenue in the fourth quarter and the full year 2016 down from 20% for the full year 2015. Our revenue churn for the full year 2016 was 5.1%, up from 3.5% in 2015. The increase was largely the result of PacWest Bank which transitioned off the platform in the third quarter of 2016. Looking ahead we expect churn to return to levels at or below 5% for 2017. Despite the expected increase in revenue churn our net customer adds grew year-over-year ending with 385 Q2 customers installed on our platform, up from 369 at the end of 2015. Our trailing 12 month revenue retention rate for 2016 was 122% consistent with prior years. As a reminder this metric compares revenue of all installed customers at the end of the previous year with the revenue from that same group of customers at the end of the current year. As we turn to gross margin and operating expense, please note that unless otherwise stated all references to our expenses and operating results are on a non-GAAP basis. Gross margin was 53.2%, up from 48.4% in the fourth quarter of 2015 and up from 52.3% in the previous quarter. The year-over-year improvement was primarily attributable to continued growth in subscription and services revenue and increased productivity of headcount and datacenter investments. For the full year 2016 gross margin was 51.9%, up from 47.3% in 2015. Turning to operating expenses, we continue to invest in our business however the pace of growth moderated in the fourth quarter. Total operating expenses were $23.3 million, up 28% from one year ago, but up only slightly from the previous quarter and we ended the year with 742 employees up from 658 employees at the end of 2015. Sales and marketing expenses were $8.8 million, up 32% year-over-year and up 4% sequentially. The year-over-year increase was largely due to headcount; while the sequential increase was primarily due to an increase in discretionary marketing spend. Research and development spending was $7.6 million, up 25% year-over-year and up slightly from the previous quarter. The increased R&D spending year-over-year and sequentially reflects increased headcount and professional services to support our product roadmap. General and administrative expenses were $6.9 million, up 25% from a year ago, but down 4% from the prior quarter. The sequential decrease was driven by decrease in professional services. I expect G&A spending to be up sequentially in the first quarter due to seasonal factors. Adjusted EBITDA was positive $1.3 million an improvement from negative $1.1 million in the previous quarter and negative $1.9 million in the year ago period. The improvement was driven primarily by the higher than anticipated revenue and gross margin. Adjusted EBITDA for the year was negative $4.5 million, a 44% improvement from negative $8.1 million in 2015. We ended the quarter with cash, cash equivalents and investments of $97.1 million, up from $92.3 million at the end of the third quarter. Cash flow from operations for the fourth quarter was $4.8 million and we incurred net capital expenditures of $800,000. Let me wrap up by sharing our first quarter and full year 2017 guidance. We forecast first quarter revenue in the range of $44 million to $44.6 million and full year revenue in the range of $191.5 million to $193.5 million, representing a 27% to 29% year-over-year growth. We forecast first quarter adjusted EBITDA of breakeven to positive $300,000 and positive $5.3 million to positive $6.7 million for the full year 2017. As in prior years, we expect the headcount additions, seasonal factors such as payroll taxes in the annual client conference, which is held during the second quarter of the year to impact the pace of adjusted EBITDA improvements in the first half of the year, followed by notable improvement in the back half of 2017. In summary, 2016 was another amazing year for Q2 with continued revenue growth, margin improvement and a huge milestone of accomplishment in posting our first quarter of adjusted EBITDA positive. In 2017, I anticipate we will continue to deliver revenue growth and improved profitability with a goal of achieving another milestone achievement of positive free cash flow for the full year 2017. With that let me turn it back over to Matt for his closing remarks.

Thanks, Jennifer. I’d like to take a moment to thank our customers for believing in us, our investors for their continued support and our employees for all their hard work in making 2016 another great year in our company legacy. I’ll wrap-up the call by setting the stage for what I believe will be another year strong performance in 2017. Our product suite is broader than it’s ever been and I expect us to continue delivering innovation to the market and expanding our relationships with customers. With that I’ll hand it over to operator for questions.

Thank you. [Operator Instructions] And your first question this morning comes from Sterling Auty from JP Morgan. Please go ahead.

Thanks. Hi guys.

Good morning, Sterling.

So, let’s with and I missed the first couple of minutes of prepared remarks, so I apologize. But couple of Tier 1 deal signings in the quarter, I heard the comments about the moderated user growth given the tough compare, but just wondering, how should we think about layering in or the timing of these new big wins, when will they start to go into production and at least begin to ramp because I’d imagine probably the timing of it is going to be a bigger benefits in 2018 and 2017.

That’s exactly right Sterling. Remember the Tier 1 tab on average about a 12 month installing given that they were signed in Q4, you’re right up against the holiday at the 12 months mark. So they’re going to impact 2018 much more than 2017, if there is anything in 2017, it will be small towards the end of the year. And then on the moderated user growth, I would point out as Matt mentioned in his prepared remarks, given the corporate and business focus deals that we signed. Those users typically or those accounts typically come with a small number of users, but the offset is higher revenue per user. So from a modeling perspective, I would model registered user growth slightly below revenue growth, but the offset will be the higher ARPU.

That makes sense. And how much of the investment here in 2017 also is kind of the expenses that are attached to the couple of new big deals that you’ve got. So in other words you have some expenses, but you’re not getting the full benefit of the revenue, so you would expect a little bit of margin hit from that before it starts to ramp?

Yes, you’ll have a little bit from that. You also in the first half of the year have the seasonal factors; remember we pay corporate bonuses annually. So in the first quarter of the year, you have large payroll tax hits, and then in Q2 we have our annual client conference, which gives the big hit. So you really see a lot of pressure on those costs in the first half of the year with improvement in both gross margin and operating margins in the back half for the year.

And last question, just Matt from a high level I think most investors and myself believe hey given the rising rate environment your core customer base should be getting healthier are you starting -- are they feeling that as the number of discussions that you’re having starting to pick up or hasn’t really hit quite yet?

Yes Sterling the tone has changed from pre-election and post-elections so the optimism around the thing you talked about lesser regulation maybe an increase in the yield curve we got to see what happens in March. But yes the tone has changed and the activity out there continues to grow. It played out kind of the way we talked about it where a lot of it came in late in the fourth quarter. So the sentiment out there is going in the right direction, our job is to go execute and turn that into bookings.

Okay, sounds good. Thanks guys.

Thanks, Sterling.

Your next question comes from Tom Roderick from Stifel. Please go ahead.

Hey guys good morning thanks for taking my question. So Matt I wanted to follow-up on Sterling’s question there just on sort of the regulatory environment and the new administration. It sounds like it did actually have somewhat of a positive impact in the fourth quarter. I guess the follow-up to that is, is that influencing or impacting the way at all you are thinking about 2017 in terms of sales capacity, can you and Jennifer both talk about how you guys think about planning for additive sales capacity how much more you need particularly as it weighs against what the pipeline is looking like right now?

Yes I’ll just talk about where I think we’re from on the field perspective; we added some folks in '16 some of that spend last year was on marketing to drive the brand. One of the things we want to do is we want to make sure our name is included in every deal like some of the bigger guys are. So I feel like we’ve got good coverage we’ll obviously add some folks throughout the year, but I feel like we have really good coverage ratios out there in Tier 1, Tier 2 bank and credit unit side of things. So we’re in really good spot as far as that’s concerned and like I said we need them to capitalize on the sentiment that’s out there and our platform resonates really well in this environment.

Great. And Jennifer a follow-up for you, I’ve got a couple of questions from some of your investors on the deferred revenue topic. Given the commentary around strongest new signings and most signings and you got couple of Tier 1s, can you just remind us sort of the puts and takes that go into the fourth quarter deferred revenue number with perhaps seasonality on the services side and then the timing around how you bill for some of those Tier 1s, how that might have impacted the fourth quarter? And then how we ought to think about it impacting going into this year?

Yes as I’ve mentioned before deferred revenue in our opinion is not a good proxy for bookings because it does depend upon the timing of when deals are signed and the collection of the related customer deposits that come along with those and Matt mentioned many of our deals came very late in Q4 and then with the holidays it will obviously be Q1 of this year 2017 before we collect many of those deposits on those deals. But what I would point out is that deferred revenue did grow still year-over-year approximately 18% in the year where we only had two Tier 1 signings both of which were late in Q4 and the prior year had several significant Tier 1s throughout the year for us to collect. So I was still happy with that year-over-year improvement given the timing of the deals during the year.

Got it, that’s helpful. I’ll jump back in the queue, but thank you guys.

Thanks, Tom.

Your next question comes from Richard Davis from Cannaccord. Please go ahead.

Hey, thanks. So a couple of just quick questions, and I realize this kind of a bond instrument but if you guys have 8.6 million registered users. If you got to kind of maximum adoptions for e-banking adoption what would that number be I'm just trying to kind of figure out what the upside capacity would be? And then I just have one quick follow-up.

Yes Richard in general banks and credit unions, which are pretty evenly mixed across those 8.6 million in their financial institutions on average the adoption for the community and regional financial institutions but around 50% to 60% of the account holders. So there’s another 7 million to 8 million that are out there. And the other thing I would say is keep in mind that there is data around credit union members, the number of members that have joined credit unions and that number has grown every year for the last five years. I think ultimately the point there is people want to bank with community financial institutions, but community financial institutions need to have the technology that’s competitive and that’s where we fit in really nicely so… Next question I guess…

Got it. So there is headwind. And then just very quickly and just kind of seeing off of Sterling’s comment just and your response is just so the -- when we went -- when this thing went public I was kind of hoping to be kind of a 30% to 35% grower, but you have kind of outline what’s happening in this current year, is it conceivable that ‘18 and beyond you would kind of recurring to that 30% to 35%. I mean I know only quarterly guidance for ‘18 but just at least at a high level should we think of this way or is this a 25% to 30% growth business?

So, Richard, I’ll point that it’s only February and the deals that we sign in 2017 will contribute significantly to 2018 and some to the back half of this year. So, I think it’s a bit early to determine exactly what the 2018 growth rate will be, but as I’ve said before I think 25% is still a reasonable bottom bound. Any the other thing that I would point out is if you look at the numbers we’ve been giving you year-over-year on transactional revenue, we continue to decline there. We anticipate 2017 transactional revenue will be about 15% of our total revenue, which in first kind of year-over-year growth rate on that portion of the business in the low to mid-teens. And so if you look at that then our core business is still growing north of 30%, it’s really being impacted by that slowdown in about a fifth of our revenue on the transactional side.

Great, no that's helpful. Thank you.

Your next question comes from Matt Hedberg with RBC Capital Markets. Please go ahead.

Thanks. This is actually Matt Swanson on for Matt. Congratulations on the strong year-end here. Looking at Q2 Smart, I know it’s early just being out for about a month, but could you talk about what the potential penetration rate in the installed base like maybe what percent are good candidates for the product?

I mean I think ultimately the product will be -- it’s a great say for any financial institution of any size. Basically what we are trying to do is take all of the data that occurs, the behavioral data that occurs on the devices marry that to the transactional information and help our customers, banks and credit unions understand ways to provide better service to their customers, cross sell their products and then even potentially across sell third part products. So, we are trying to digitize their customers experience and then use that as a way to help them grow their business, no difference than Amazon or Netflix understands the next movie I need to watch or the next product my wife needs to buy.

And then follow-up on that you talk about it as being a comparative differentiate maybe if you could expand a little on that about how that product competes competitively? And then was it being developed internally, could you talk a little bit about what could be next in terms of features or potential additional products using some of these machine learning and statistical analysis that’s used in the Q2 Smart?

So, from a differentiator perspective, when you -- as the only vendor of any size that has a single platform that takes all of the transactions from the mobile phone to tablet and the desktop. We then marry that to our Fraud Analytics product. So we really started machine learning behavior analytics in 2009 when we started our Fraud Analytics products, which essentially does the same think, it just determine whether somebody is conducting a fraudulent transaction or not. That has been adoptive with great success. So, the differentiators for us is there is really nobody else after in the market that tells the complete story that we do which is anytime one of the customers touches these devices, marry to the transactions and then able to give you a better view of what the customer is doing. So, there is really nobody else that’s telling this story as holistically as we are there is plenty of people talk about behavior analytics, but nobody that’s got it in the field like we do at this point that I am aware of. And the next set of products as I talked about a second ago, the first part is how you provide better service to the customer and that's one of the thing that we think we can do digitally better than you do in person. The next thing is how do we help the bank cross sell products? So, identify somebody that maybe in the market for a home equity loan, identify somebody who might be saving for a car and then go put a product in front of them. And then ultimately we believe there is an opportunity to cross sell third-party products where the bank gets a piece of that transaction, so they can begin to generate revenue in ways other than just what they get money for and give it out for.

Alright, thanks for your time.

Thanks, Matt.

Your next question comes from Peter Heckmann from Avondale. Please go ahead.

Good morning everyone, nice results.

Thanks, Pete.

Matt, could you give us an update on the competitive dynamics, I think Fiserv required a number of older platforms this year, Jack Henry any rolled out there then old product are you seeing anything in terms of competitive efforts that are worth calling out anyone kind of catching up as it were. And then in a similar wane how do you feel about pricing on renewals?

So in a competitive market there is no change, we have heard of lot of the products you’re talking about have been in the space for a long time and the ownership may change. But we know how to compete fairly well against those and a lot of times when those transactions happen it creates opportunities for us because there is changes that have to happen. So, there is really no change in the competitive environment, it’s still the big guys Jack Henry, Fiserv, FIS, NCR, those are the ones that we are regularly going head-to-head with. And the question was around…

Pricing on renewal, I’ll take that piece. And I feel good about our pricing on renewals, given the pace of innovation in the new products that we’re rolling out, even if there is some pressure on getting volume discounts because the banks has growth their registered user base, where we have been very successful at offsetting that by adding in new products that we have developed since they took the last ones. And so the renewals is included in part of that trailing 12 month revenue retention, which is consistently been north of 120%, and was 122% again this year. So I feel good about our pricing on renewals.

Good stuff, good stuff. And then just on the M&A side, two small deals since the IPO, just what your relative appetite there, did you think we’ll see additional acquisitions potentially in ‘17?

Yes, I mean we’re out looking for things and participating in those types of conversations, it’s got to be strategic for us, nothing transformational, we will look for things that can help with margin expansion and growth and in perfect world both of those. But nothing to report on that front right now, we have been very happy with the centric and social money transactions we have done. As I alluded to there is going to be some exciting stuff around Q2 labs, we think coming out which is the engine behind that social money. So we’re really happy with the ones we have done and I think they have been -- they are happy as well. So nothing transformational, we will continue to look at stuff that’s out there, but we want to find things that we can obviously grow within our base.

Great, thank you.

Thanks, Pete.

Your next question comes from Terry Tillman from Raymond James. Please go ahead.

Hey, thanks good morning. I was afraid I wasn’t going to be able to ask question there. But so nice stuff in the quarter, my first question Matt just relates to you alluded to 2016 there was a lot of success in terms of new business more on the corporate side and then obviously that translates into maybe lower number of registered users, but at higher ARPU. Is that something we should actually based on where you have been focusing on innovations and just where the sales cycles are, should we continue to see that sales motion in 2017, where it’s more bias towards corporate or could it shift back towards consumer?

I mean I think you probably see a similar pattern, as we saw in 2016 around that mix, I mean that’s why we alluded to the ARPU number probably going up with the success around not just corporate, but even the business banking stuff, it takes some of your user numbers down, but yes I think you probably see a similar pattern. Jennifer, do you?

Yeah, I would agree.

Okay.

So we won’t worry about that.

Well and I do have a tiny follow-up. So last year there was a variety of net new products that were being worked on and then have come to provision, Smart being kind of one of the latest ones, if we think about ‘17 and potentially new ARPU generating products, could we kind of see a similar pace or is it going to be more of a digesting what you brought to market and then just trying to sell the hack out of those new products. And so less about new product catalyst in ‘17 as oppose to ‘16? Thank you.

Thanks, Terry. We are an innovation company and we are investing 18% to 19% in R&D and we have many things that we’re working on, whether its enhancing the platform or things outside of the platform, typically we talk about those product releases at our client conference which is this year in April and then we’ll release more of it in May, but yeah the innovation train is going to keep moving. But the thing I would say, like things around corporate or Smart, they are very early in their lifecycle we have a lot of enhancements and improvements to do those products because we think they are bigger opportunities. But yes, we are going to continue to innovate there will be new products as well as a lot of enhancements to the existing stuff. So not done by any means.

Thanks.

Thanks.

Your next question comes from Mayank Tandon from Needham & Company. Please go ahead.

Thank you, good morning. Most of my questions have been answered, but Matt just staying on the corporate theme, could you talk about what is driving your success early on against some of the incumbents who have been in this market for years. What is the value proposition that is helping you win? And then what is the roadmap for investments to help you continue to gain share on that side of the market?

Yes so thanks Mayank. Our methodology here that has worked, which is we go try to find problems in the financial services space. We then go hire people with deep domain expertise, which we did for corporate banking in particular. And then we work closely with the technology team and a group of developers that work with the modern stake and we go and try to go build technology that can help financial institutions compete with the mega banks. And so we started this initiative with corporate banking several years ago. And when we walk into a community financial institution or even a credit union and talk about corporate banking we're able to offer them corporate functionality on a single platform, which gives them leverage around one set of interfaces to the core to check imaging, statement imaging, a better user experience, touch enabled which is if you look at what Wells Fargo and those guys are doing they're rolling out touch enabled corporate banking. And so when we're able to go to this financial institution and offer them corporate functionality that works with the modern look and feel and design and works with modern browsers. There is nobody else that’s doing that today. And so our differentiation is working on a modern technology stake and then chipping away at the future functionality. And so we walk out to these financial institutions, we're able to show a track record of delivering and executing on a roadmap maybe slower, maybe faster depending on the future functionality, but when we go do that and then we talk about the corporate stability 13 years of doing this whether it's been retail or small business we've executed. So that formula has worked for us and we're going to continue to go drive that message. And then we will build the functionality one step at a time working closely with our customers to do it. And I think we have a very collaborative spirit with our customers and it shows up in our products.

Thank you, that's helpful. One quick one for Jennifer, Jennifer in terms of gross margin trajectory, could you just give us some color on how we should think about the gross margins for '17? And then maybe just provide some color in terms of your long-term gross margin targets in terms of timeline and in terms of hitting those targets you've laid out in the past?

Yes I expect as I mentioned earlier that the investment that we'll have in the first half of the year and hiring as well as seasonal factors around payroll taxes and client conference, et cetera will really moderate the growth or the improvement in the first couple of quarters of the year. But you'll see significant improvement in the back half we're still very committed to annual year-over-year improvement. It may not be the 400 or 500 basis points a year that we've had to the last couple of years, but it will certainly be a nice improvement. And I think you will see us exiting next year with Q4 getting closer to our long-term margin than it is to where we're at now. So I'm very happy with the progress that we've had there, and I think we're well on our way to hitting that 60% number.

Great job guys. Thank you.

Thank you, appreciate it.

Your next question comes from Joseph [indiscernible] Capital. Please go ahead.

Hi thanks for the opportunity to ask a question, just two quick ones. Given strong exit to the year in new customer signings you could provide some commentary on the strength of your visibility to this year's guide versus in the past? And then I've got one follow-up.

Yes so as we said in the past ever since IPO road show and consistently thereafter going into the year given the fact that it takes on average six to nine months to install our customers and then on the Tier 1 customers it's closer to 12 months. We really have 90% plus visibility into our revenue guide on January 1. It's really the determining factor of our year-over-year growth rate as the deal that we signed in the first half that we can't get into revenue in the back half of the year. But going into the year we have 90% plus of our revenue under contract and we just have to execute and make sure that the implementation being delivered and we have a history of doing that.

And we didn't factor any acceleration into our guidance.

Right. And then secondly if you could comment maybe just at a high level on trends in average deal size given good traction with a few at least a few larger clients, what are you seeing in terms of the average deal size for new deals at this point versus say a year ago or 18 months ago? Thanks a lot.

Yes we don't disclose average deal size, but I can certainly tell you that we’ve had year-over-year increases.

Thank you.

Your next question comes from Brian Essex from Morgan Stanley. Please go ahead.

Thanks. This is Ivan sitting in for Brian. So, around your comments on free cash flow, you indicated that you might see positive free cash flow for the first time in 2017, could you please give us a little bit of color as you see it currently, in terms of what the cadence of that might look like what are some of the puts and takes that we should take into consideration?

Yes I think that you'll see still no positive free cash flow in the first half of the year our capital investments tend to be more heavily weighted towards the first half of the year. But our CapEx will decline significant in the back half of the year. And so, I think we could have for certain one possibly two quarters of free cash flow positive and I believe it will be strong enough that we will be free cash flow positive for the full year of 2017.

Great, thank you. And a quick follow-up on one of the prior questions around pricing, congratulations on displacing that large core processor, but how much did pricing factor in, in that decision? Have you seen any changes in terms of how, especially your banking clients are approaching pricing, particularly given what is arguably a better environment for banks, given what's going on with the rates and potentially with regulation?

Yes I mean, the -- a lot of the bigger guys use price as a way to compete. And so, we've operated in that environment in the existence of this company for a long time. So, I -- in particular I don't -- I can't go through whether one or more competitors and others, but we've always had to deal with that pressure and we've got to go sell our value and that's one of the things that we've seem to be able to do really well. So, nothing more embracing.

Thank you.

Thanks, Ivan.

Your next question comes from Brad Berning from Craig-Hallum. Please go ahead.

Hey, good morning. On the cross sales you talked about record sale, and I think if we backed into this right, it looks like almost half of your revenue growth this year came from cross sales and given the record that you're talking about, is that the kind of sustainable rate do you think that is going to be that bigger contributor going forward, given your commentary about the product breadth expansion?

I really think you'll continue to see a good chunk of the revenue growth year-over-year, coming from cross sales, we've disclosed historically that we've had north of 120% trailing 12 month revenue retention and that comes from that combination of registered user organic growth. Where we get excess user fees, combined with the cross selling, given the products that were released this year and what we have on the horizon for next year, I don't expect that trend to change.

And then sort of follow-up on that on the product innovation going forward and products roadmap for this year, can you talk a little bit further about some of the products that you're going to talk about in April on your Annual Day that you guys have can you give a little bit more color about what that part of roadmap looks like this year?

We're really going to hold that for our client conference in April. So, it's a little premature, we'll talk more about some of that on our May call.

Okay, we'll look forward to that. Thank you. Congrats again.

Thanks, Brad. Appreciate it.

We have no other questions in queue at this time. We thank you very much for attending today. This concludes today's conference and you may now disconnect.