Q2 Holdings, Inc. (QTWO) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Q2 Holdings First 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] Thank you. Bob Gujavarty, you may begin your conference.

Welcome to the Q2 Holdings conference call for the first quarter ended March 31, 2017. I’m 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 Web site 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 Services section of our Web site. Let me also highlight our participation in several investor events this quarter. We will be attending the JPMorgan TMT Conference in Boston, the Canaccord One-on-One Conference in Toronto, the Craig Holland One-on-One Conference in Minneapolis and the Stifel TMT conference 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 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 our -- any forward-looking statements. During this call, we will 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 are reconciled to GAAP in the tables attached to our press release, which is available on Investor Services Web site. The nonrevenue financial measures we will 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, reconciliation is not 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 today’s first quarter 2017 earnings call. Today I'll share some highlights from the first quarter before turning the call over to Jennifer to provide a more detailed look at our first quarter financials and provide our guidance for the second quarter 2017. We generated revenue of $44.5 million in the first quarter, up 32% year-over-year and 6% sequentially. We also added more than 300,000 users in the quarter, representing 32% year-over-year growth even in the absence of any major customer go-lives. On the sales side, we saw some nice net new wins, well balanced across bank and credit union markets. But where I really like to focus on today is the news from our biggest annual client event, CONNECT, which we hosted in early April this year. CONNECT is an opportunity for us to collaborate with our clients and to get their feedback and input on our strategic direction. This year we had nearly 600 individuals attending, representing the majority of our client base and a record number of prospects, up more than 35% from last year's conference. The general sentiment from customers is that they remain cautiously optimistic about an improved environment in 2017, and are preparing themselves to pursue new markets and to continue their investments in the digital channel. As usual, we shared important news about the future direction of our products at the conference, and I’m pleased to say that our product road map seemed to resonate with clients and prospects alike. We spent a good deal of time at CONNECT talking about our corporate products suite. Corporate rounds out the functionality on the commercial side, and since adding it to the Q2 platform, it has presented us with both cross-sales and net new opportunities, even in the credit union market, where these institutions have not traditionally had a strong commercial focus. As credit union's increasingly turned to business banking as a new frontier for growth, our credit union clients feel our corporate product suite enables them to rapidly enter the commercial market and become highly competitive. One illustration of corporate's ability to help us win new business comes from the ESL Credit Union, a full service financial institution in Upstate, New York with more than $6 billion in assets. Business banking is a critical strategic initiative for ESL, which serves a full range of Rochester businesses from small to large. In late 2015, ESL chose our corporate banking product suite, addressing a major area of customer feedback and concern. Today, ESL is live on the product and actively using it to attract and develop new business relationships. Since launch, customer satisfaction has risen significantly, demonstrating ESL success in growing its business by deploying new technology and using it to effectively serve new markets. At the end of the first quarter, we had multiple clients in production with corporate, which I believe contributed to its positive reception at the conference. As we have stated, our corporate product represents a long-term investment for Q2, and I'm encouraged by these initial successes. We also made some new product and feature announcements at the client conference. And this year, we were excited to fully unveil our digital account opening product and our Q2 Labs product suite. Today, the digital banking channel is a robust ecosystem, but on-boarding new account holders exclusively through the digital channel remains a challenge for community financial institutions. For example, according to a leading online account opening solution available in the market today, 77% of users who attempt to open an account online using their product, abandoned the enrollment process. The lack of an effective on-boarding product impairs the financial institution's ability to go fully digital, requiring new account holders to visit a branch to open an account. Even though 70% of consumers would prefer to open a checking account online. Q2's account opening solution is designed to solve for this. Written in the cloud with modern technology and an elegant user experience, it represents an important inroad to helping our clients provide the fully digital experience of a branchless bank. The product prototype was well received at the conference, and we expect the product to become generally available by the end of the year. The Q2 Labs team had several dedicated agenda sessions at this year's conference. And we couldn’t be more pleased with our clients receptiveness to the innovations and offerings from this team. Today, Q2 Labs offers a toolkit of open APIs that empower financial institutions, fintech companies and developer communities to offer solutions around goal-based savings, direct bank solutions, integrated biller-direct solutions and debit card capabilities. These APIs along with several products that have been built on top of them are designed to enable our clients to rapidly deploy innovation to enhance or augment their existing digital strategies. The solutions offered by our Q2 Labs team represent exciting possibilities for partnerships with both clients and fintech companies. And we will continue to share news from the team throughout 2017. In addition to product innovation, we remain committed to providing a world-class hosting and service experience for our clients. And at the conference, we discussed a new disaster recovery solution that we rolled out in the first quarter called Active-Active. Active-Active takes full advantage of our two world-class data centers to noticeably mitigate the disruption experienced by an end user in the event of an unplanned outage. The uptime of our products is mission critical to our clients and their account holders. And since 2012, we’ve invested more than $20 million into our hosting environments. This new Active-Active solution represents one benefit of that investment, helping us provide what we believe is one of the highest-caliber hosting experiences in the industry. I'll wrap up my commentary by reiterating that we received overwhelmingly positive feedback from clients and prospects at CONNECT. I believe our client conference is an excellent parameter for how we are performing. But to see our client base collectively pleased with our operational execution and excited about our future direction is extremely encouraging. With that, I will hand the call over to Jennifer to discuss our financial results and provide our guidance for the second quarter 2017.

Thanks, Matt. We’re pleased to deliver first quarter revenue, which exceeded analysts' consensus combined with a solid year-over-year improvement in adjusted EBITDA. I will briefly review our results for the first quarter before finishing with updated guidance for the second quarter and full-year of 2017. Total revenue for the first quarter was $44.5 million, an increase of 32% year-over-year and up 6% from the previous quarter. Our increased revenue in the first quarter was principally the result of growth in subscription and services revenue. Subscription revenue growth was largely driven by organic user growth within our existing customer base, while transaction-based revenue in actual dollars was essentially flat to the previous quarter, representing 16% of total revenue in the first quarter 2017, down from 18% in the first quarter of 2016 and 17% for the full-year. As we turn to gross margin and operating expenses, please note that unless otherwise stated all references to our expenses and operating results are on a non-GAAP basis. Gross margin was 52.5%, up from 50.8% in the first quarter of 2016 and as expected down slightly from the previous quarter. The year-over-year improvement was primarily attributable to continued growth in subscription revenue and improvement in services margins. I expect gross margins to be relatively flat in the second quarter and show more meaningful improvement in the back half of the year. Despite seasonal headwinds, we continued to see operating expense growth moderate in the first quarter. Total operating expenses were $24.5 million, up 15% from one year ago, but up only 5% from the previous quarter. Sales and marketing expenses were $9.2 million, up 19% year-over-year and up 5% sequentially. The year-over-year increase was largely due to headcount, while the sequential increase was primarily due to an increase in payroll taxes associated with annual bonus and commission payments. Research and development spending was $8.7 million, up 20% year-over-year and up 14% from the previous quarter. The increased R&D spending year-over-year reflects increased headcount and professional services to support our product road map and the resulting increase in shared overhead expenses. Increased payroll taxes associated with annual bonus payments also contributed to the sequential increase. General and administrative expenses were $6.6 million, up 4% from a year-ago, but down 5% from the prior quarter. The sequential decrease was driven by a sales tax audit assessment included in the fourth quarter of 2016, as well as a decline in professional services, partially offset by seasonal factors, including higher payroll taxes. Adjusted EBITDA was positive $1.1 million, up from negative $2.4 million in the year-ago period. The improvement was driven primarily by the higher revenue and a moderation of growth and operating expenses. I expect to see operating expense growth remain below the pace of revenue growth for the remainder of 2017. We ended the quarter with cash, cash equivalents and investments of $82.2 million, down from $97.1 million at the end of the fourth quarter. Cash flow from operations for the first quarter was negative $10.7 million, and we incurred net capital expenditures of $5.4 million. Cash flow was negatively impacted by a one-time performance-based payment of $6 million related to the Centrix acquisition completed in 2015, as well as the payout of 2016 annual bonuses and associated payroll taxes. I expect capital expenditures to remain elevated in the second quarter before declining in the back half of the year and I continue to expect the Company to achieve positive free cash flow in the second half of 2017. Let me wrap up by sharing our second quarter and full-year 2017 guidance. We forecast second quarter revenue in the range of $46.9 million to $47.5 million and full-year revenue in the range of $192.3 million to $194.3 million, representing 28% to 29% year-over-year growth. We forecast second quarter adjusted EBITDA up positive $600,000 to positive $1 million; and positive $6.5 million to positive $7.7 million for the full-year of 2017. With our Q1 financial performance showing solid year-over-year improvement, I believe we’re on track to deliver improvement towards profitability and positive free cash flow in the back half of 2017. With that, let me turn it back over to Matt for his closing remarks.

Thanks, Jennifer. In closing, the first quarter was a good start to the year. Having met with the majority of our clients at our conference, I feel comfortable saying that our client base is pleased with the quality, delivery, and direction of the technology. And their appetite for innovation continues to grow. Thanks again for joining us on the call, and with that, I'll turn it over to the operator for questions.

Certainly. [Operator Instructions] Our first question comes from Sterling Auty from JP Morgan. Please go ahead.

Good morning. Thanks, guys. Let's start with the new user growth in the quarter. You mentioned that there was no major go lives in the quarter. Can you talk us through what’s driving the growth, was it special marketing programs from particular customers or perhaps new customers just doing something different to attract users?

So Sterling, it's primarily the organic user growth and it's just continued adoptions. We do have an end using -- end user marketing group within the organization who works routinely with our customers to help drive that adoption of the online platform. And so that’s really what it was. There were no large retail go live during the quarter. It was primarily organic user growth.

Got it. And then one follow-up. With the increase in guidance for the full-year, should we take it that it was on the back of signings that you did this quarter, or just figuring out the timing of go lives on some of the deals perhaps that you did last quarter that's giving you the increased confidence in the revenue for the year?

If you remember last quarter, we told you that the majority of those deals were signed right at the very end of the quarter, and so it's really now getting the clarity we’ve had kickoff with most of those customers on their implementations and really getting the clarity around the go-lives of that big group of deals that we’ve signed at the end of the year.

All right, great. And actually, I’m going to try to sneak one more in, and apologize. You talked about the corporate solutions that you are offering and gave a great example, but when you look across the customer base is there a sense that you can give us what portion of the customer base you think a solution like the corporate offering would be applicable to?

Yes, Sterling. Corporate banking when you think about on -- from a banking -- community bank perspective, it is applicable to all of them. They’re all trying to go get those larger businesses in their community. And so what we’re able to offer these, whether it's a small financial institution, sub-billion dollars or above $10 billion, is the ability to offer functionality to -- with a modern user interface and experience and it's touch enabled to where they can go to the local municipality, the power company and maybe pick up their cash management business by using technology, which is something they haven't been able to use before. So while many of the banks above $10 billion have a corporate banking solution that’s in place, and that’s kind of what we are replacing, there is a use for it at every community bank. Now we talked about ESL, a $6 billion credit union that’s using it, and they’re talking about -- I spent some time with them at the client conference, and they’re picking up business in their community by using this community -- this corporate banking product to go out and leverage some of the relations they -- relationships they have on the retail side. So I believe credit unions, small banks, big banks are going to be able to use this platform to go differentiate themselves and pick up more business.

Great. Thank you.

Thanks, Sterling.

Our next question comes from Mat Hedberg from RBC Capital Markets. Please go ahead.

Yes, guys. Thanks for taking my questions. Matt, it sounds like customers and prospects at your user event were cautiously optimistic on the market, I believe you said. I’m wondering though if you have any thoughts on what that could mean for the M&A environment within the banking sector?

Yes, Matt, it's a good question. One of the things that was interesting when I met with countless prospects and customers at the client conferences was the majority of them wanted to talk about their acquisition strategy. They're going to go buy somebody or they're looking at buying people, and they want to make sure that we have slotting available to handle that and that we can work with them on those acquisitions. So the acquisition climate is -- continues to be very -- a strong environment for us. And we’ve been historically, remember, we've added more users than we've lost through acquisition. I think now we're up to 140 or 150 customers that are more than $1 billion in assets, and if you normalize credit union assets, we're probably close to 200 that are above $1 billion. And that’s the group that’s going out and making acquisitions. So it's a hot topic. Our single platform provides some advantages for them when they’re doing these acquisitions. So I think you are going to see a continued flow of acquisitions, and we certainly hope we will be on the right side of that, like we have historically.

That’s great. And then the digital account opening product sounds great as well. I’m curious what are some of the features that you’ve added that could improve the account opening conversion? And it sounds like it won't go G&A until the end of this year, but any idea on pricing for that? Thank you.

Yes, so -- from a feature perspective, it's driven through the mobile channel, so things like taking a picture of your ID, simplifying the workflows, credit checking, all those things are things that we’ve made much more elegant in a mobile phone experience so that you don't have to go into the bank or start it over or go find a bunch of information. We also -- in a lot of cases, with pre-populated information that we have based on our relationship if we have an existing relationship with you. The pricing is going to have a base subscription fee and then a transaction fee for every account that gets opened.

Great. Thanks a lot guys.

Thank you.

Thanks, Matt.

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

Hi. Good morning, Matt, Jennifer, and Bob. How are you all?

Good. How are you, Terry?

Good. How are you?

Good, well. Matt, I know you’ve only got so much time in the prepared or scripted remarks to talk about the different initiatives, customer activity, et cetera. I didn’t hear anything about Q2 SMART or kind of your machine learning analytics products or capabilities. Could you give us an update on that and how that’s coming along, both from just a product standpoint and a monetization standpoint?

Yes, Terry. So I appreciate you bringing it up. From a SMART perspective, last call we talked about 20 customers -- about 20 had signed up for it. We are well above that number now, and we are implementing it in many of the financial institutions. And what we are going through is I’m trying to work with the customer to identify things that they are trying to cross-sell or relationship expansion. So it could be, did you realize that we have a CD or did you realize we have an investment department also things like driving e-statements to customers that don’t. There is a lot of efficiency that comes out of that. So making very good product -- progress there. I think later in the year, I’m going to have some more meaningful metrics to share with everyone regarding SMART and so -- and then along with that, they will become more of a financial story around that. But I want to get a little further along before we get into the economics of it at this point, because right now we are knee deep in installing it and partnering with our customers to make it a truly effective product.

Got it. Okay. Thanks for the help on that. And then on Q2 Labs, you’ve had Q2 Labs for a while, but it sounds like you are kind of moving to the point of -- kind of almost like a platform strategy with third parties and an ecosystem. Am I wrong in assuming that there could be some opportunities to monetize, as folks use your open APIs and extend your platform?

You are not wrong to assume that. If you think about community financial institutions, fintech companies, developers and open architecture, where it allows people to enhance or augment their strategy, is very valuable. And we are in the early innings, but we think there's a platform strategy that could become very interesting. And I will continue to report on that, like I talked about, later in the year as we get more and more progress down that road.

Okay, thanks. And then, Jennifer, just a quick question on capitalized R&D. I guess, 4Q or -- year-over-year basis has been ramping. Like how do we think about capitalized software or R&D going forward? Thank you and nice job.

Thanks, Terry.

So I think you will start to see as we’ve released some of these products that we’ve been working on and capitalizing over the last couple of years is they have now reached general availability and are moving into the maintenance mode, I think you will see the amount of R&D that’s being capitalized decline throughout the year.

Okay. Thanks, Jennifer.

Thanks, Terry.

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

Hi, guys. Good morning. Thanks for taking my questions. Jennifer, can you just touch on the gross margins this quarter with respect to -- they’ve been down quarter-on-quarter, there is probably some element of revenue mix in there maybe tilting towards services or something like that. I know you mentioned that they were sort of expected to be flattish in Q2 and then rise momentarily in the back half of the year, but can you kind of talk about the puts and takes in that gross margin number? What impacted it this quarter?

Sure, Tom. There really weren't any significant changes in the mix of revenue that’s been fairly consistent. We told you at the end of last year we signed a couple of Tier 1s, so you've got some timing of investments in that organization, as well as the other seasonal factors that impact Q1, right. Hiring typically slows in Q4 because of the holidays. And then Q1, when you pick up hiring, also has the higher payroll taxes because of the annual bonus payments that happen in that time frame.

Got it. Okay, good. And then, I know you guys always get questions about the deferred revenue and is that a good proxy for the pace of new businesses, is that a bad proxy. In looking at the deferreds this quarter, it suggests that perhaps there was a slowdown on that. But again, timing seems to come into play on those deferreds from time-to-time. So can you talk about the deferreds as it sort of was or was not a proxy for the pace of new business this quarter and how we ought to think about perhaps modeling that line for the year here?

Yes, Tom. I mean, you are right. We’ve always said that we do not believe deferred revenue is a good proxy for bookings. Most of our customers pay monthly or quarterly in advance versus annually in advance. Really, the largest component of that deferred revenue are the upfront implementation fees, and we’ve told you historically as well that the larger upfront implementation fees are associated with the larger Tier 1 clients. So if you look at the trend of deferred revenue, right, we signed five Tier 1s in '14, 7 in '15 and then two last year. And so you kind of see that same trend line happening in deferred revenue.

Yes, got it. Okay. Matt, last one for you. Just as you went and canvassed your customers, I -- again I know it's way too early in this [indiscernible] policy change happens a lot slower than we all wanted it to, but now your customers have had another 90 days, first 100 days of new administration there, to think about how the world could be changing. What sort of optimism do you sense is out there and what sort of planning do you see your customers putting in place for any potential regulatory changes or easing of regulations that could benefit your customer base?

Yes, Tom. So after canvassing the customers on the process, like you talked about, and one of the things that you had -- I mentioned already was the acquisition strategy was one of the things. But I think taking a step back like you have, kind of look at the 100 days, if you think about it a year ago, the tone was -- there was -- we began to see this delay in decision making, particularly on the bank side. The election occurs in November, and then we have one of the best quarters in the history of the Company in the fourth quarter of this year, a lot of that was probably the pin-up demand; continue to win some deals in the first quarter; come out of client conference, which was the first week of April, prospect activity was up 35% from the year before. So a lot of momentum on the booking side. But I always remind people -- this group of people are not riverboat gamblers, and I mean that in a good way. They take their time. There's still going to be a risk in -- there is still be an RFP. There still going to be a risk assessment, all those different things that go into these decisions. And so -- but more people coming to the table was what we're looking for, and then it appears we're seeing that. So we've got to capitalize on this momentum and this cautiously optimistic approach that they have. And I think that they’re, I guess -- what I would say is they're relieved that the other party didn't win. That is a political statement but not for me. It's just more a matter of they feel like there's somebody fighting to reduce the regulations as opposed to expand it. We actually had a group of people that were up on Capitol Hill, including our Chairman this week, working with legislators to try to explain the value of community financial institutions. And so we're actively involved in that. There was obviously a lot of community bankers there, but I think that the optimism is what we are trying to capitalize on, and I think if some of the stuff gets done, it could be a tailwind for us in the back half of this year.

Perfect. Thanks for the color.

Thanks, Tom.

[Operator Instructions] Your next question comes from Richard Davis from Canaccord. Please go ahead.

Yes, thanks. Most of my questions have been asked. But again a couple of inbounds from investors. Jennifer, are you changing at all your free cash flow opinion to just being profitable in the second half, or is it still likely you'll be free cash flow positive for the full year?

I think you will definitely see free cash flow positive in the back half, and really it's the timing of deals when they are signed and when we collect those deposits as to whether we will be free cash flow positives for the full-year or not.

Got it. And then with regard to, this is -- a lot of brain damage, but rule 606, will do you guys anticipate implementing that?

We will implement that on January 1, 2018, at the beginning of our next fiscal year as required. We are currently in the process of going through all of our existing contracts, determining any change. The big part was the essential nature of the implementation services that we have and all of the configuration and hooks into the back end. I don't expect there to be a significant change. I think those will still be recognized ratably [ph] over the term of the contract. So while we do have some small things that may change a little bit, I wouldn’t expect a significant change from 606 adoption.

Got it. We will put a stand aside offer the $20 million you’ve to pay to the auditors, but that’s a sign [multiple speakers]?

Exactly.

A great use of money. Anyway. I will let you go to the next person. Thanks.

Thank you.

Thanks, Rich. I appreciate it.

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

Hi, good afternoon and thank you for taking the questions. Matt, if I could just kind of beat the economic horse a little bit more. As you are talking to your customers and you are talking about a better environment, I mean, is there a way that you can kind of parse that out between the smaller regional commercial financial institutions and maybe the larger institutions that you may have in the pipeline. And in connection with that, maybe relate how you see yourself a -- I guess competitively positioned that spending environment where your products may line up more on the best of breed side versus larger platforms that address those issues?

Yes. So thanks, Brian. I think, I would start with from a smaller to larger perspective. I think you see the smaller ones begin to move a little faster. When I say smaller, I mean to -- sub a billion. They start to move a little faster based on some of this. They don't have as much -- it's little easier for them to move than the larger ones. And we will begin to see the Tier 1s, the upper end of Tier 2s, I think, convert later in the year just because it's a little more machinery for them to get lined up. Now keep in mind one of the things that we're seeing is there is a lot more planning going into these projects. And so they're coming in, used to be, they would sign a contract six months before the expiration of the other contract -- of the current contract, and they would sign up, and we would start the conversion and go live 6 months from there. We are beginning to see a lot more planning, which is a good thing. It allows us, Jennifer and I, to plan accordingly. And then from a competitive perspective, we still leverage this single platform consistent user experience across all the devices. You become more efficient as a community financial institution. If you have a single front end that integrates to all your touch points on the back end, we do integrate to everybody back office system and all the ancillary systems that surround that. That’s one of our specialties. And then also there is a lot of leverage out of the velocity in which you can deliver new technology. And that’s one of the things with a single platform, will we write a feature once and run it everywhere that we can get in technology faster. And in my opinion, there is nobody's put more software on the ground in the last 10 years from a digital perspective than us. And so we build off of that. And I think there is a lot of frustration in the space around the pace in which innovation happens with some of our competitors. So we continue to try to be nimble on how we deliver technology, but also we talked about Active-Active. Things like that, features and functions may sell software, but services like Active-Active provide great service and support for our customers that really differentiate us in the marketplace. So there is a lot of different things that could go into from a competitive advantage prospective, but it's still single platform, provides a better user experience, makes you more efficient and allows us to deliver technology more rapidly. Also we get all the data and then also the delivery and the support from the service of our products from the -- just come off the client conference is a big differentiator for us.

Got it. Super helpful. Maybe for Jennifer or just a quick follow-up, the guidance seems to imply for the second quarter a little bit pressure on EBITDA margins. Is that just seasonal due to the conference sales and marketing spending, while you have some pressure on gross margins as well, or is, I guess anything else to kind of lean on to get a little bit color on the trajectories to go through the rest of the year?

No, what really is that, if you think about the fact that our user conferences in the second quarter, and that’s a high six figure number, we would actually show some pretty good leverage quarter-over-quarter had it not been for the customer conference in the second quarter.

Got it. Super helpful. Thank you guys so much.

Thanks, Brian. Have a good day.

Your next question comes from Arvind Ramnani from Pacific Crest Securities. Please go ahead.

Hi, Arvind.

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

It's actually Brad. One follow-up as regards to discussions with customers, and maybe we can back up to little bit higher level on activity. Can you talk about Board level discussions getting involved in branch transformations and accelerating IT spending in aggregate for the broader bank category in order to address some of the branch transformations that are taking place? I’m just kind of curious if that is as much of the driver that you are seeing for increased activity as much as the political environment?

Yes, I think, as I said earlier, that the underlying issue is these community financial institutions need to update their technology and the usage in the data is overwhelming that the customers are flocking to this channel. And so, when you mentioned Board discussions, what has been interesting is our Chief Strategy Officer, Chief Technology Officer and myself are in front of -- and other peoples who are in front of lot more Board of Directors at these banks and credit unions than we’ve ever been in the past, because they’re realizing the importance of this message. That’s a very good thing for us. As far as branch transformation -- the branch transformation, obviously, the branch is becoming less and less important. As we drive things like online account openings, there is less reliance on the branch. Q2 SMART, you eliminate the need to have somebody cross-sell things. There used to be an expression turning your tellers into sellers. That -- people aren't going to the branch, so that doesn’t matter anymore. So we are continuing to eliminate the need for the bank to have this physical footprint, and what the board are looking at is how do we drive down that costs and then take some of these savings and apply it to the bottom line, but also how we go -- use some of these expenditures to expand our digital footprint, and we are in fantastic a position in those types of discussions.

Appreciate that. And then on the innovation side, obviously glad to hear the digital account opening side of it. As you know, I’ve been interested in that for quite a while, but one follow-up on the corporate side of it. Can you talk about the product pipeline there a little bit? It seems like there is maybe some opportunities for open APIs not necessarily with you, but with the opening up straight to the customer on behalf of the bank. And I’m just kind of curious, is there a need and appetite in the market to help create stickiness between the banks and their corporate customers by going that direction? That seems like that could be kind of the next evolution. And I’m kind of curious where are you at in that evolution and the ability to deliver on that?

Yes, it's an interesting question. I think that’s going to come down the road, but if you look at -- some of these banks focus on property managers or accountants or attorneys, and what they want to do is be able to have software that integrates directly with the technology that those types of businesses use. And so, what we’re doing is, we’ve always had an openness philosophy, how do we go and integrate to those things? And we -- and our technology enables that, and that’s one of the things that’s beginning to happen is, you go to talk to somebody that’s heavily tied to property managers, and we will tell them, well, we can access their GL or whatever might be that they are using to where they can integrate that into the digital banking experience. It's a little early to -- for us to talk about any specialization in any particular industry, but that’s where we are going, and it's important to understand that our technology contemplates that as we build it and roll out new stuff. So it's an interesting perspective and I think it's going to be an opportunity for us as we continue to enhance this platform.

Great to hear. Again, congrats on the innovation trends that you continue to drive, and look forward to seeing more things unfold.

Thanks, Brad. Have a good week.

Thanks, Brad.

Your next question comes from Arvind Ramnani from Pacific Crest. Please go ahead.

Hey, yes, first of all, I apologize for getting dropped off. Nice quarter and I really appreciate the feedback from your recent client conference. Can you talk about how you are -- kind of how you’re developing your partner channels, and in particularly relationships with the large systems integrators?

So from our partner's channel, we continue to always look at things, should we build it, should we partner or buy? And we continue to enhance our partnership -- partner relationships out there. So, nothing meaningful in the first quarter to talk about, but we continue to partner where we need to. It's kind of build on the question that Brad just asked a second ago. It could be a partner that provides a feature and function that the bank needs, or it could be a partner that potentially is a customer of one of the financial institutions. And then, we are -- as far as systems integrators go, there is no new announcements there. We continue to find partners in some of the large Tier 1s that do more project management work than systems integration, but we’ve had some systems integrators we’ve worked with, but there is nothing really new to report on that end.

Great. And we also spoke to a number of your clients over the past few months, and all of them are very complimentary in your solution. Clearly, they love Q2 and what you will do for them, kind of the one area of feedback was kind of the commercial banking solution had a little bit of a better, I guess, like a sales pitch than functionality. And just wanted to see if you kind of -- your view on that? And also are you -- what’s the path to kind of further develop this commercial banking solution?

Yes, Arvind, you were cut out on the part, which -- what was the comment on the -- what their comments were on product.

They said it was a better sales pitch.

Well, we are the only Company who is trying to keep our marketing right in check with our product. And so if we are out selling things beyond what we’ve, we will have to look at that, but in general, the feedback I got from the clients, I think there is a balancing act around -- they want everything right now, and it's very difficult to build that. Of course, that’s always our objective to get them things as quickly as possible. But keep in mind, quality is a big part of this, because these are the most important customers that they’ve for the commercial banks. And so we’ve got to make sure we get it right, and there is a lot of things that go into testing and releases and quality. So I think one of the things that will be interesting is, I -- they are always going to want more, but I think the feedback that we are getting, especially the ones that have gone live in the first quarter and then the ones we're in process now, is wow, this is -- the quality has improved tremendously, and we look forward to more and more things coming up. I don’t never expect our customers to say we are done. That’s why you see about 18% going into R&D. We’ve got a lot of work to do, but my feedback directly from the customers was hey, keep it coming, but also keep the balance with quality -- keep it balanced with quality. So, I appreciate the feedback, and we’re always looking to improve.

Yes, great. That’s great. Just kind of one last question on the financials, I mean, is -- it is now too early to kind of talk about being EPS positive, or you think kind of its more for a 2018 type of conversation?

Certainly for a full-year, it's not -- it's a little bit early. I do think that we’ve the ability to be operating positive on a GAAP basis in Q4. And really just the timing and mix of deals that we sign and the investment we make to support those deals depends on how soon we get there. But I do think that you will see that in Q4, exiting Q4.

Great. Terrific results and good luck for rest of the year.

Thanks, Arvind.

Thanks.

[Operator Instructions] Your next question comes from Joseph Vafi from Loop Capital. Please go ahead.

Hi, guys. Good morning. I was wondering -- I know that Q1 is generally not your strongest customer signings quarter, but commentary on customer signings in the quarter relative to that kind of seasonal pattern you see, and maybe some comments on maybe customer signing so far in Q2. And then, may be an update on some of your large Tier 1s and the implementations, including Northern Trust, and then I’ve got a follow-up. I’m sorry, First Republic. I’m sorry, yes.

Yes, okay. I was almost going to say I don’t know who Northern Trust is. So, yes, we provided the color. I’m going to gave color on the year and how bookings have shaped up and what we are seeing out there. I will tell you I’ve been really pleased with the conversions after the clients conference so far, but we still have some work to do on the rest of the quarter and the rest of the year. It never ends. So -- but I’m optimistic about the pipeline and our ability to convert those. Jennifer, you?

Yes, First Republic, I think is one that we had told you last time, we expected to start rolling out their customer waves. They’re one of the larger customers that will do it over many months. And so I don’t think you will see a large sequential pop at any point in time. I think you will see gradual growth throughout the year as they continue through their customer waves. And with FRB, that is the 14 -- or 12, the five that we signed in '14, and the seven in '15, will now all be live on the platform. And so the two that we will be working to implement on the platform throughout this year on top of rolling out the continuous waves for First Republic are the two that we signed at the end of last year. And we did sign them at the end of last year. So with an average 12-month, that puts you right into the holidays this year. I'd expect they’re going to contribute to 2018.

Great. That’s helpful. And then I think, Matt, following up on some of your prepared remarks on investing in reliability and uptime of the platform, I mean, I think people realize that functionality and user experience is really good with your platforms. You think that maybe that was one of the, maybe competitive areas where maybe some of your larger competitors still have maybe a little bit of a competitive advantage over you on uptime and the like, and this helps to perhaps fill that competitive gap even from a perceived basis? Thanks.

Yes, Joseph, I think there is a perception that they are so big, they have to be better, but I don’t think the data from an -- I mean, a lot of times we win deals it's a matter of uptime issues, but there is that perception for sure. I think -- we always view things like this as extending the lead rather than taking the lead. And so we are going to continue to invest in things like this to continue to provide a world-class experience for our customers. But yes it's -- there is a perception out there that because they are bigger they’ve better posting, and the data just doesn’t support that and I think our wins in the market indicate that that’s one of the challenges that they’re running into.

Thanks very much.

Thanks, Joseph. Have a good day.

This concludes today’s conference call. You may now disconnect.