Q2 Holdings, Inc. (QTWO) Q3 2017 Earnings Report, Transcript and Summary

I would like to welcome everyone to the Q2 Holdings Third Quarter 2017 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 third quarter ended September 30, 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 not, it is available on the Investor Services section of our Web site. 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 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 the Investor Services section of our Web site. The non-revenue 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. Finally, I’d like to highlight our participation in two Investor Conferences this month. We’ll be attending the RBC and TMC Conference in New York and the Stifel One-on-One Growth Conference in Chicago. Let me now turn the call over to Matt Flake.

Thanks, Bob, and welcome to all attendees on today’s call. In the third quarter, we generated revenue of $50.1 million, up 31% year-over-year and 5% sequentially. We had another solid quarter of delivery execution, adding just over 400,000 users, which brings us to nearly 10 million registered users at the end of the quarter, representing more than 27% growth year-over-year. I was very pleased with our sales performance from the quarter. While the third quarter is typically is not strong for bookings, we experienced success across both net new and cross sales, signing several large banks and credit unions. The first win I want to discuss is a net new $8 billion bank in the Midwest United States. This bank was running disparate systems for consumer and commercial customers, and both were badly in need of an upgrade. They undertook an extensive vendor evaluation with the goal of consolidating systems to enhance their technology and improve the user experience. The banks showed Q2 to serve both consumer and commercial account holders, and expect the Q2 platform will not only improve internal operations, but also help position them for growth. Our cross sales team also had a great quarter, highlighted by the largest product cross sales in the history of the company. A Tier 1 credit union in the Northwest United States, which initially purchased our corporate product suite in 2016, chose to expand the Q2 platform to serve its consumer accountholders as well. The credit union decided the positive experience with Q2's corporate product as a key factor in its decision making. This is significant because, as I've mentioned before, the consumer opportunity is typically larger than the corporate opportunity with credit unions. But our client success with our corporate product contributed significantly to our selection. Cross sales is a key element of our growth strategy, and this is just another example of why I continue to expect good things from our cross sale group. And on the corporate side, our momentum continues to build in 2017. We signed another Tier 1 institution, a $5 billion bank in the Northeast of United States, which purchased our corporate banking suite to replace their existing corporate solution. All three Tier 1 wins from the quarter were highly competitive deals that involved all of the major competitors in our space. The breadth and quality of these wins gives me confidence that our message, our platform and our robust product portfolio, are continuing to resonate in the marketplace. Earlier in the call, I mentioned our user growth, which brought us to nearly 10 million of registered end users at the end of the quarter. This is a significant milestone for the company. And I’d like to recognize everyone involved. It takes a lot of working pieces, the right product, the right client partnerships and the hard work of our teams, to reach 10 million. And we view this milestone as validation of our mission, innovation, people and partnership with clients. On the product front, I’d like to provide a brief update on our Q2 open portfolio, which is the set of API based services that we formally announced in the second quarter. During the third quarter, we announced a new product, called CardSwap, in partnership with Chime Bank, a leading branchless bank in San Francisco and the first financial institution to launch the product. CardSwap is designed to help financial institutions generate valuable interchange revenue by getting their debit or credit cards at the top of wallet, and is significant because it represents the first turnkey product we've developed using the Q2 open APIs. Since its launch, CardSwap has been positively received by clients, prospects and the industry, with one publication complementing it for its rapid development, deployment and ability to generate revenue. Although, it's early for the Q2 Open portfolio, we believe CardSwap is a good example of how Q2 Open will enable us to more rapidly develop new products, independently or with partners, expand on our client and partner opportunities and equip our clients and new partners to bring innovative products and tools to market. Earlier in the year, I commented that we were expecting to see elevated M&A activity among financial institutions in 2017. Now that we’re nearly end of the year, I would like to give you an update on how that activity may impact our customer account for 2017. Currently, I anticipate 13 logos will be lost acquisition with five of them going to existing Q2 customers and the other eight acquired by non-Q2 customers. The combined effect of this M&A and normal churn will result in a customer count down slightly from the 385 we reported at the end of 2016. The timing of this M&A, combined with the phase timing of certain larger clients go wise and customer migrations and the impact of the market uncertainty we discussed during the 2016 election cycle, will result in slightly lower than anticipated Q4 revenue, as Jennifer will discuss in more detail during her remarks. But I will reiterate that because of our ongoing focus on acquiring strategic clients, we have historically added more users that we’ve lost through acquisition. And I anticipate our revenue churn to remain at 5% or less in 2017, reflecting the strength of our business and our client relationships. I’ll wrap up my prepared remarks by mentioning that we also made a key hire to expand our leadership team during the third quarter. As we announced earlier, we are welcoming Christine Peterson, a more than 20 year veteran of the FinTech Industry, as our new Chief Revenue Officer. In this role, Christine will lead the entire sales organization, including our direct and relationship management teams. We’re excited to have her join Q2, and I believe she’ll be a great asset in helping us further capitalize on our market opportunity. With that, I’ll turn the call over to Jennifer.

Thanks, Matt. We are pleased to have deliver solid third quarter results. I will briefly review our results for the quarter before finishing with updated guidance for the year. Total revenue for the third quarter was $50.1 million, an increase of 31% year-over-year and up 5% from the previous quarter. We’re also pleased to report non-GAAP operating income of $1 million for the quarter, marking the first quarter of positive non-GAAP operating income in the Company’s history and a full quarter ahead of prior expectations. Our increased revenue in the third quarter was the result of growth in subscription and services revenue. Subscription revenue growth was driven by a combination of organic user growth and customer go lives in the quarter. While services revenue benefited from the new customer go lives, as well as incremental projects services at several existing customers. Transaction based revenue in actual dollars was up sequentially and represented 16% of total revenue in the third quarter, consistent with the previous quarter and down from 17% of total revenue in the third quarter of 2016. 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 52.3%, flat versus third quarter of 2016 and down slightly from the previous quarter. Gross margin for the quarter and the year was negatively impacted by a higher mix of services revenue as we continue to incur services expense related to several large customers who have decided to pursue a phased migration of their account holders. Services margins remain negative, and therefore, this mix shift resulted in a significant headwind to gross margin improvement in 2017. Total operating expenses were $25.2 million, up only 9% from one year ago and down 4% from the previous quarter. The year-over-year increase in operating expenses was due to headcount growth across the organization with the primary focus on research and development, while the sequential decline was due to the timing of our Annual Customer Conference, which was held in April. Adjusted EBITDA was $3.6 million, up from negative $1.1 million in the year ago period and up from $1.4 million in the second quarter. The improvement was driven primarily by the higher revenue and moderating growth and operating expenses. We ended the quarter with cash, cash equivalents and investments of $88.9 million, up from $78.7 million at the end of the second quarter. Cash flow from operations for the third quarter was $11.6 million, driven primarily by a large increase in deferred revenue. During the quarter, we incurred net capital expenditures and capitalized software development costs of $4 million, resulting in $7.6 million of free cash flow for the quarter, which is an encouraging step towards achieving our goal of free cash flow positive for the entire second half of 2017. Let me wrap up by sharing our fourth quarter and full year 2017 guidance. We forecast fourth quarter revenue in the range of $51.4 million to $51.8 million, and full year revenue in the range of $193.6 million and $194 million, representing 29% year-over-year growth. As Matt mentioned earlier, this represents a reduction from previous revenue guidance of $600,000 at the midpoint. As some revenue from customers, which we expected to recognize in the fourth quarter, is now pushing into the first half of 2018 due to circumstances, the timing of which we cannot control. One instance relates to the timing of pending customer M&A. We generally have good visibility and depending M&A, but little control over when the transactions actually close and then users are migrated. In another instance, a customer has adopted our solutions but they have slowed the rollout for reasons internal to their organization. We expect to begin recognizing this revenue in the first half of 2018. We forecast fourth quarter adjusted EBITDA of $3.3 million to $3.7 million, and we are raising our full-year adjusted EBITDA guidance, up from a midpoint of $8.3 million for the year to a range of $9.4 million to $9.8 million for the full-year 2017, resulting in adjusted EBITDA margins of 5% for the full-year, up from a negative 3% in 2016. In summary, the third quarter was characterized by strong improvements in adjusted EBITDA and free cash flow, as well as our first quarter of non-GAAP operating income. We are pleased by our financial performance in the quarter and the leverage shown in our model. Now, let me hand the call back to Matt for his closing remarks.

Thanks, Jennifer. I want to reiterate that I'm proud of the organization for a solid third quarter. We continue to innovate and expand our product suite, signed multiple Tier 1 deals and achieved our first quarter of positive non-GAAP operating income. As we look forward to the fourth quarter, our pipeline is strong and I am optimistic that we will close the year out on a positive note. With that, I’ll turn the call over to the operator for questions.

Thank you [Operator Instructions]. And our first question comes from the line of Sterling Auty from JPMorgan. Your line is open.

Good morning guys. This is Jackson Ader on for Sterling. First questions from our side, as far as the full year revenue guidance the reduction is concerned. How do you think that splits between customer go lives being pushed out and any impact from M&A?

So the impact from M&A is the majority of it.

And then just to follow-up and so that we’re clear, the go lives that maybe you were expecting in the fourth quarter that are now going to be in 2018. Is there any risk that there would be a permanent reduction of revenue or is this simply recognition of revenue being pushed out of quarter or so?

This is actually a customer who set their minimums lower than what we typically see, and where we were expecting significant growth. So they’re actually live on our system and we are recognizing the minimum revenues. But we’re expecting them to get to their growth expectations during the first half of 2018. So we are recognizing revenue from them. They’re not a complete push out. It’s just that the level of revenue is going to take another six months to get to where we thought it was going to be.

Our next question comes from the line of Tom Roderick from Stifel. Your line is open.

So I guess I can’t help but think about this, it's sounding like a little bit of an air pocket with some level of reacceleration that comes back next year. So I guess with that as a theme in mind, I’d love to hear your thoughts on that. I fully understand you’re not guiding to 2018 at this point. But you when you consider that you had a couple of Tier 1s land this quarter, your biggest cross sale ever. Those seemed like things to happen earlier than you expected. Curious how you might suggest that we pluck their trajectory of growth as we model into ’18? Is that something that will still be more back half loaded before it comes back? Could we see it in the first half? How would you suggest to think about all that?

It certainly think it’s more back half loaded. In previous calls, I’ve said that 25% is a good number for ‘18. And I still think that 25% is achievable. However, as Matt mentioned in some of his prepared remarks, we’ve seen an increase in M&A activity, some of which is carrying in to 2018, and the timing is a little bit difficult to predict exactly when things will close and when users will move on or off to system. So given the current slippage, the fact that we didn’t sign any Tier 1s in the first half of ‘17, I would put a bit more conservatism into my 2018 outlook. And given what I noted there, I think the range of 23% to 25% is reasonable, but expect the year-over-year growth to be better in the back half of ’18 than the first half, as I discussed at the beginning.

And Matt relative to your comments on M&A, I want to split the M&A discussion in half year. Because when you -- you suggested that there was a handful of logos, maybe 13 logos that were set to be acquired or were being acquired. And then five will go to you and eight will go away. There is an element there of some customer churn or loss that probably doesn’t impact your model until next year. But on the other side of it, Jennifer I want to hear your comments, I hear that hey, there is an element of a positive nature where M&A will positively impact you, just not right not right away, not in the fourth quarter. So can you just go back to that discussion of M&A to help us understand what you see permanently falling out relatively to your customers that have been acquired? And is this a temporary hold up as M&A works in your favor from acquiring certain other customers? Thanks.

Yes, Tom, it’s a good question. I think the color I provided on M&A is, always start with the fact that we are very deliberate and we focus on acquiring strategic customers. And that’s work for us from an acquisition perspective and that we have, as I said in the call and in the prepared remarks, we’ve actually acquired more end users than we’ve lost historically. The only ins and outs of that are -- is that when you’re losing customers to acquisition, they’re typically the smaller customers. And so they get converted quicker than our customers, which are acquiring the larger custom banks that are out there or credit unions. So the ins and outs are we lose the customer two acquisition and they’re typically a smaller ones that they get off the system, they come up revenue faster. But we are acquiring larger customers and it take a little longer to get them, and so that's the math. And if Jennifer wants to add anything to that feel free.

The only thing I would add to that is even with the increased M&A, as Matt said, we still expect churn to remain at the 5% or less level.

Our next question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.

Matt, first of all, congrats on the three Tier 1 wins this quarter, very nice to see the momentum there. I know these deals can typically be second half weighted. I'm curious, can you talk about the Tier 1 pipeline should generally speaking into Q4 and then your expectations into 2018, if possible?

In the last call, we talked about how we started to feel like the tailwinds were picking-up on the banking side of the business. Credit unions have been pretty steady for us. And I think it actually materialized a little faster than I thought it would. So I put a lot of pressure on the sales organization in Q3, and they definitely delivered on that. So as far as Q4 goes, I feel really good about Q4. I'm confident in the Q4 pipeline and the pipeline into '18 look solid as well. We’ve got to keep building it. You add talent like Christine Peterson around the organization, it's great for her to walk into an environment where we’re winning and she’s got a little bit of the time to put her plan in place, and how she wants to structure the organizations. So I feel really good about the Tier 1 pipeline in Q4. I'm confident we’re going to do well there and then we want to continue that momentum into '18. But it certainly feels like the market is getting in a better spot. And I will tell you that this is the best up sell in 18 months if you think back to the August call we had in '16, it's a good place to be right now.

That's great and actually led me into my second question. Christine, congratulations on that hire, it's a lot of -- she brings a really, really interesting background to the Company, lot of history in the space. It’s probably too early to tell exactly what she is going to do. But just from a high level, I mean what the thought process on what she is going to focus on when she gets acclimated to Q2?

I think she is going to be involved in a lot. She was a part of FIS, which is a company I have a tremendous amount of respect for and she was there as they grew from a couple of $100 million to $9 billion. And to see somebody that’s experienced in that and be able to take her learning's and her experience, plus the relationships she has built over these years. I don’t really put a fence around her and what she wants to do. I can learn from her as much as she can learn from us. But I think she is going to come in and focus on making sure we’re messaging appropriately, that we’re strategically positioned in the right way and look at our customer life cycle, from a relationship management perspective and determine whether we're doing things the way that a billion dollar company does. Because as I mentioned before, we're trying to build this company into a billion dollar revenue company and it's not more than that. So having people in it, it's been a played out through is really valuable. So she is a great hire for us. We’re fortunate to have her and I'm glad she is on the team now.

Our next question comes from the line of Terry Tillman from SunTrust Robinson. Your line is open.

My first question, I have two questions. The first question and I would also like the prior comments about the new hire I did that and the new Tier 1 win. But the first question is on Q2, the Open technology. Matt, maybe could you just help us with how meaningful this could to revenue? And could it do something to even spark more Tier 1 activity where they can use the underlying API, and use it in a flexible way and build on top of it?

Terry, so as you know, we are somebody who talks about good news after it happens rather than before it happens. So I’m very optimistic about the Q2 Open product. I think it is products. It’s a way for us to talk to financial institutions FinTech in ways that we haven’t been able to before. There is a natural fit for Tier 1 financial institutions, and I mean some of the largest in the world with this product, because it allows them to augment and enhance their strategy -- augment and enhance their strategy rapidly. They can begin to right to these APIs and rollout product, specifically to whatever they may be targeting. It might be millennials, it might be veterans, it might be seniors. So there is a very natural fit there. From a meaningfulness that rather give us a little time, but we’re out with a lot of activity on that side. But give me a little bit time to roll that into the plan and the model to see how it’s going to look like. But we are really excited about the Q2 Open products. And as you can tell, we’re steadily knocking down capital of FinTech that partner with one of our banks. Last quarter we talked out that, Chime Bank, this quarter. We look to give you more good news in the first half of next year as well.

And I guess, Jennifer, if you were kind enough to actually help us with H1 without giving us the formal guidance. But just from an overall perspective, as they’ll keep layering on more recurring revenue and have good new bookings. How do you think about the balance of investing for growth versus some operating leverage, further operating leverage into ’18 and beyond? Thank you.

So, I think that you’ll continue to see operating leverage into ‘18. We’ve produced good operating leverage from both the sales and marketing and the G&A lines this year. And I expect that that’s going to continue into the next year. And then I’m really pleased with the leverage that we’ve shown in R&D line this year, especially given the fact that we’ve reduced the amount of software development that we’ve capitalized by about 50% from the level that we were capitalizing in 2016. So that makes me even more excited about the leverage on R&D. So I think you’re going to continue to see that leverage. And even at the revenue growth rates that we talked about that 23% to 25% range, I still believe that -- I’m pretty comfortable with the exception of a couple of outliers at where the analysts have our adjusted EBITDA targets for 2018.

Our next question comes from the line of Richard Davis from Canaccord. Your line is open.

Thanks. A lot of questions have been asked. But Jennifer, when you say leverage, are you planning on -- do you have any plans to change your expense growth trajectory? Or is it more like what the revenue growth is happening and therefore we get operating leverage over a fixed cost? And then I have a follow up.

I mean, we don’t have any necessary cost reductions planned. But I think the level of growth that you’re seeing year-over-year is beginning to moderate because we’ve now got the infrastructure in place, and you’re beginning to see some scale out of that.

And then the second question is of the firms that were acquired that did not go to Q2, which technology vendors would be there or they go to?

I mean, from a competitive perspective, it's all the players we usually referenced, it's Pfizer, Jack Henry, FIS those are the ones that we're competing with primarily. On the corporate side, you maybe see a little bit of bottom line in ACI. But it's the normal competitors.

Our next question comes from the line of Brad Berning from Craig-Hallum. Your line is open.

I was wondering if you can spend some time on the innovation pipeline, update us where you’re at on rolling out remote checking accounts, give us an update on the technology initiatives you've got on the payments and P2P side, as well as in the other thoughts that you've got as you move along for the year?

Yes, so I'll jump in, because you mentioned P2P. We're seeing on a low basis, but we're seeing some real growth out of the P2P side of the business, lot of activity coming out of that. We're really happy with our partner, First Data, and their Acculynk product on P2P. From some of the other products, Q2 SMART, we talked about -- we have 10 to 15 in the ground in the third quarter. I think we actually have more than that. And I anticipate having about 10% of the user base running their data through that system by the end of the year. So that's a lot of data we’ll be collecting, and hopefully that can materialize into some valuable input to help our customers go out and generate revenue and provide great service. The account opening stuff continues to make great progress. We're integrating that into many of the backends. I’ve talked about the Q2 Open side of stuff where there is CardSwap, or just the CorePro aspect of that. It's very positive. And you’re sending a lot of success, obviously, out of our corporate banking product, which is an ongoing investment and something we are all-in on and we’re going to continue investing. So there is a lot of innovation going on here, and we’re going to continue to be differentiated by that.

And follow-up on the corporate banking side, I think you guys have talked about earlier in the year, at some point you'd start to give some metrics on that. Can you give us some current thoughts about the contributions as you roll that out?

Yes. I mean, I think as we talked about, it does -- it provides a higher ARPU on for us. There’s a fewer users, but more per user. I don’t know if we have any financial metrics for you. We haven’t broken it out from a corporate perspective. But it's a single digit million, probably in '17 and we’ll see what it does in ’18 as we end the year out to what’s going to contribute to it.

Our next question comes from the line of Brian Peterson from Raymond James. Your line is open.

Thanks for taking the question, and congrats on the Tier 1 momentum this quarter. And on that point, if we think about that three deals getting included this quarter and view what the pipeline looks like for the fourth quarter. Just getting those deals across the finish line help you focus on potentially more of this opportunities in the fourth quarter, so we could potentially thinking about more Tier 1 deals coming to the fold in 2017?

I mean, you want to bring them in whenever as soon as you can. And so bringing them in in the third quarter, nobody got punished for that, and then we've still got more of them that are out there to get done by the end of the year. Q4 is usually a big quarter from bookings, not just Tier 1 but Tier 2, Tier 3 and across. And so we’re laser focused on getting those deals done. And like I said, I'm very confident in the pipeline for Q4, but now we just got to go execute on it. So it's a good time here at Q2.

And maybe for Jennifer, just talk on the services gross margins, you referenced. Any help on what headwind that was this quarter? And should we expect that, is the new norm at least through 2018, as some of these implementations continue? Thanks guys.

And what I would say is if we had been at similar levels, and I’ve said in the past that services is been about 10% or 11% of our total revenue, it elevated significantly during the year this year because of some of the Tier 1 phase rollout, et cetera and the Tier 1s having more services than Tier 2 or Tier 3. If we have been at a similar mix, you would have seen, I believe this year about 200 basis points of improvement in gross margin. So the mix shift really did produce a headwind there. And then going into next year, what I’d say there is, again I want to get through the rest of this year and see what other Tier 1 deals might close in the fourth quarter, and then look at the mix of the services on the Tier 1 deals signed here on the back half of the year, and determine whether they’re going to be phased rollouts or go live all at once could actually impacted. So if we’re continued to be successful in Tier 1, then I do believe that that mix could remain elevated. But I don’t expect it to increase significantly year-over-year than this year.

Our next question comes from the line of Joseph Vafi from Loop Capital. Your line is open.

First maybe, Matt, if you could talk a little bit on the pipeline. If you could parse for us maybe perhaps the differential looking out next year in terms of deals that you may see as a function, just perhaps the legacy incumbent player that contracts coming up for renewal versus perhaps the percentage you see in the pipeline where some of the banks are really focused on away from event for the perhaps is in there now that those banks focused on adopting best technologies available in the marketplace, that would be helpful. And then I have a follow up.

Yes. So Joseph, I think, the way I’d answer the question is, typically, the competition doesn’t change and the back office providers do most of -- they have a front office application as well. And so what we’re trying to do is identify the financial institutions that want to use technologies the way to differentiate. And so we’re trying to find the ones that are tech leaders and trying to drive innovation. So we naturally gravitate towards those and that goes back to my comments earlier around the M&A piece, which is as long as we’re winning the deals that the banks are in it for the long haul, I think we’re going to ultimately end up being on the right side of the M&A activity. And we’ve said in the past, we want to focus on winning the right deals and be selective, and just like the banks are as well. So there is not really a difference in those banks that have -- that are strategic or operationally focused. We just try to sort them out and determine which one of those is looking at this from a long haul perspective and then willing to go and make a five to seven year commitment with us.

And then was there anything specific to call out that clearly the win rate of Tier 1s was much higher in Q3 than some of the other quarters, given that all the Tier 1s this year are in Q3. But is there anything to callout, specifically why that were more successful in Q3? Or is it just a number of deals out there or -- and I know it's competitive thing. But anything you could provide on that would be great? And then finally on CardSwap, just want to make sure. Is that -- shouldn’t that to be sold as a standalone product, or is that actually bundled in with your system? Thanks.

Thanks for asking on CardSwap. CardSwap is a standalone product. We literally -- we had a group of clients and 10 or 12 of our clients in the other day and shows them a quick instance where we turned it up in less than an hour. So it is a product that can be turned on into the platform. As far as the Q3 execution, it's just really -- it's all on the sales team. They brought those deals in. They pushed hard. There is a lot of chaos in the third quarter when you think about weather events and everything else, plus vacations and getting back into the year, so into the quarter. So the sales team just executed that. I want to give them all the credit. They just do work and then they also, as I said, have built the pipeline that makes me, gives me tremendous amount of confidence going into Q4 around the Tier 1, the Tier 2 and the Tier 3 side, as well as the cost out of the business.

[Operator Instructions] Our next question comes from the line of Brian Essex from Morgan Stanley. Your line is open.

This is for Matt or Jennifer, maybe Jennifer kind of numbers driven. You had a sales and marketing build last year, and you've gotten a lot of leverage off of that this year. Can you maybe talk about how we could expect that to be accretive to the margins, the bottom line, going forward? Is that more quarter driven now than headcount driven? And should we expect the same amount -- I mean, it grew 31% of their rate of growth of revenue this quarter. So anticipate the same or better leverage in the next year, or is there more to do there?

I expect the same or better kind of leverage into next year. I think for the most part, our sales team is fully staffed. And I believe bringing Christine in is going to focus that group even more now that they have some 10 year and are fully ramped on their quota with productivity improvements.

And then maybe follow-up for Matt. As you kind of build your pipeline and bring on larger deals, what is the composition? I think you noted that one of your Tier 1 customers came on as a full platform customer. What's the attach rate to your pipeline? And then what’s the philosophy of bringing new customers on, as you’re trying to just get your foot in door and then expand or are incremental customers coming on with higher attach rates?

I think it's a little bit of both. As I’ve said too many times in this call, we want to find the customers that are looking to use technology as a way to differentiate. You have some situations where you get a new ownership group that takes over a bank that maybe an older stagiaire bank that’s not thinking innovatively. But a new group of investors come in and they want to use technology as a way to drive down cost. And then you have some of the leaders out there and innovation, like Umpqua, or Trustmark that are out there trying to continue to enhance their position and grow more market share. And we will -- a great example of us getting our foot in the door and line in to get to know us is the credit union we talked about on this call. Southern Corporate a year ago delivered the products, built the relationship with them. They ultimately decided to go with us on the retail side because of that experience, and that's the biggest cross sale we've had in the history of the Company. And if you’ve listened to the earnings calls over the past couple of quarters, we've had some of these standalone corporate sales. And then you look at the other Tier 1 we signed in this quarter, they bought everything. And so we believe getting them in the door, building a relationship with them and then understanding about how we think about the future, how we build our products, how we service our customers, is a huge differentiator for us. And we’ll begin to continue to build on that. So I’ll tell them the whole thing if they want it, but if they want to buy just corporate banking, we’ll do that. If they just want to buy retail, we’ll do that. And we’ll get to know them and we’ll provide great service, and we’ll build great products and we’ll continue to expand our relationship and get broader and wider in the account.

Any context in terms of where attach rate stands, either now versus historical, and how to expect that to trend, going forward?

I don’t have that detail right now. But we’ll go look into that and follow up with you, Brian.

Our next question comes from the line of Arvind Ramnani from KeyBanc. Your line is open.

I just wanted to -- if you could talk a little bit more about Q2 SMART and the impact that you’re expecting from this offering. Is this a differentiator that really helps drive business, or is it just more for nice future? And also if you can talk about how much intelligence it has and what client feedback has been?

Arvind, I think every time we rollout a lot of the new products in the history of this company. And I think what we have seen is, you have to start by getting the product in the ground with the customer. And as I said, we probably -- I think we’re close to 20 that are in the ground with Q2 SMART. We’ll run more than 1 million of our end users through the system by the end of this year. So we’re collecting a lot of data. And I think a lot of people don’t buy your technology based on what you’ve done in the past, but how you view the future. And one of the things for us is we believe that data is at the center of what these financial institution have to do to compete and differentiate. And so we’re having a business that in less than 18 months -- or product in less than 18 months, we were able to get 10% of the user’s data running through it, is something that helps sale software for us. And then ultimately, as we work through the products, I think there is going to be, through the data, you’re going to begin to see many examples of ways for Q2 SMAER to help a customer provide better service. You may see somebody that has a cash flow problem, and reach out to them and also on the line of credit or some relief, or you may see somebody who is on the system that looks like a retail user, that’s actually running a business. So you could offer them more products on the corporate or treasury side. And then ultimately, we think there is opportunity to potentially sale third party products to these financial institutions. So that they can begin to generate revenue in ways other than just what they get money for and give it out for. So it is a product that we are -- we believe is very ambitious and will be very differentiated. It takes time for these to build. But just like our fraud analytics product and our corporate product, we’re going to keep you updated and work with our customers to build a product that is -- allows them to compete for the long haul. So we think that we are really building an ecosystem where we’re helping our customers generate revenue as opposed to just extracting software cost out of them. And once we get to that point, we can have a conversation about sharing revenue rather than how much you got to pay me. I think, it’s just gives us a whole another legged of growth in a differentiated that help us win more and more deals. So SMART is an exciting product for us and we’re going to keep you updated on it and we hope it will be -- it will be a meaningful contributor of revenue in the future. But right now, it’s adding value on winning deals, differentiating us and it will continue to -- we’ll continue to sell it and enhance it, and make sure that it does all the things that I’ve talked about.

Thank you. That was really helpful. Congrats on good quarter and good luck for rest of the year.

And there are no further questions in queue. Thank you for joining, and this concludes today’s conference call. You may now disconnect.