Q2 Holdings, Inc. (QTWO) Q3 2018 Earnings Report, Transcript and Summary

Good morning, my name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings Q3 2018 Conference Call. [Operator Instructions]. Bob Gujavarty, Vice President Investor Relations, you may begin your conference.

Welcome to the Q2 Holdings Conference Call for the Third Quarter ended September 30, 2018. 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 rebroadcast 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. 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'll be referring to both GAAP and non-GAAP financial measures. We believe that non-GAAP measures are representative, 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 nonrevenue financial measures we'll discuss today are non-GAAP unless we state the measure is 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 not available on a forward-looking basis without unreasonable effort. Let me now turn the call over to Matt.

Thanks, Bob. I'll start today's call by sharing our revenue performance and user growth from the third quarter of 2018. I'll then discuss some business highlights from the quarter before handing the call over to Jennifer for a detailed look at our financials. In the third quarter, we generated revenue of $60.5 million, up 21% year-over-year and up 3% sequentially. We had a particularly strong quarter of user growth as well, ending the quarter with more than 12.3 million registered users on the Q2 platform, up 24% year-over-year and 8% from the previous quarter. I'll start my prepared remarks by highlighting the successes of our platform team, both from a sales and operations perspective. On the sales front, our cross-sales and net new teams each had solid quarters. On the net new side, we saw a balanced performance across banking credit union markets, including the addition of a top-50 Tier 1 credit union in the Northeast. This was a highly competitive evaluation, in which we managed to beat out the incumbent solution provided by one of the core processing providers as well as several of the point systems providers we encounter regularly in the credit union space. In the past, I've mentioned that our strong track record of delivery is a major differentiator for Q2, and as our end user growth suggest, we had a fantastic quarter in this area, adding a record of more than 900,000 users through both organic growth and 14 successful go-lives. I particularly like to highlight the retail implementation of OnPoint credit union, a credit union in the Pacific Northwest with more than $5 billion in assets. OnPoint originally signed with Q2 for use of our corporate products suite in 2016, and later made a decision to move their retail account holders to our platform as well. In partnership with OnPoint, we rolled out our retail product suite to more than 200,000 account holders on 1 day, in what we felt was one of our most successful Tier 1 launches today. Even 14 years into this business, we continue to learn with every new implementation project, and I believe the quality of our processes only continue to improve. I'd like to thank OnPoint for making this such a successful project and for their continued partnership. Transitioning from the platform team's continued execution, our Q2 Open team is also gaining meaningful traction, where we saw a substantial progress in several areas. On the sales front, Open had its largest bookings quarter to date, signing several new clients for use of the Open portfolio. Chief among them was a reseller agreement we reached with a large payments provider in the space who will consume the Biller Direct API to enhance the functionality of their existing product set. While this is an exciting win that I feel further validates our Q2 Open portfolio, we expect substantial a ramp time in terms of development and adoption, and Jennifer will discuss the financial impacts further in her prepared remarks. I'm also excited about the progress of several clients who began to roll out there Q2 Open-powered products in the third quarter. As a reminder, the Q2 Open launch model and path to revenue is substantially different from that of our platform business. As opposed to platform, whose contract start with high minimums and moderate growth over time, Q2 Open deals typically begin with lower minimums but with the potential for much more rapid growth. With that said, I'm pleased to share that in the third quarter, we began to see a few of our large Fintech clients enter a phased rollout of debit cards to their users, which are supported by the Q2 Open technology and issued by some of our financial institution partners. In this arrangement, Q2, the Fintech and the bank will share in the float and interchange generated through these debit cards. Interchange revenue will be driven by transactions on these debit cards, and float will be generated by balances held in their related accounts. So we anticipate considerable ramp in terms of revenue impact of these debit-focused agreements, and we will continue to provide updates on this line of business going forward. As I said on last quarter's call, we feel that there's a growing opportunity in helping these Fintechs partner with financial institutions for mutual benefit, and we believe Q2 Open is playing a critical role in bridging this gap, as evidenced by the teams continued momentum. Finally, I'd like to wrap up my prepared remarks by mentioning that Q2 has officially closed the acquisition of Cloud Lending Solutions, as we announced on October 16. As a reminder, Cloud Lending is a SaaS business that offers end-to-end lending and leasing platform. Their solutions help lenders close more loans, close them faster and provide a better experience to borrowers throughout the process. By adding their powerful lending platform to our existing suite of products, we enter a unique position in the market, from which we can lead end-to-end digital transformation for a broad range of financial services providers and their customers from retail to commercial and deposit origination to lending. We're about 90 days from our initial announcement of the definitive agreement and I've had the opportunity to meet with many Cloud Lending customers, prospects and partners, both in the U.S. market and abroad. There is unanimous excitement on both sides about the product synergies between Q2's existing portfolio and the Cloud Lending platform. Many of Cloud Lending partners have expressed that they are all the more confident in Cloud Lending Solutions thanks to the scale and investment benefits they anticipate realizing as part of Q2. Additionally, the inbound interest we've received from Q2 customers has been even stronger than I anticipated. There is tremendous pent-up demand among financial institutions to digitize and automate the lending process, both for their staff and their borrowers. Several of our platform customers have asked us to come in, sit down and workshop with them on how they can use Cloud Lending Solution to increase their loan volumes, and we are focused on quickly but deliberately integrating Cloud Lending's technologies with our platform in order to capitalize on these opportunities. Thanks. And with that, I'll turn the call over to Jennifer.

Thanks, Matt. I will briefly review our results for the third quarter before finishing with updated guidance for the fourth quarter. As a reminder, our 2018 results and updated guidance reflect the adoption of ASC 606, which we adopted using the modified retrospective method. Therefore, 2017 results have not been adjusted such as the year-over-year comparisons for revenue and certain expenses do not reflect a true apples-to-apples comparison. Total revenue for the third quarter was $60.5 million, an increase of 21% year-over-year and up 3% from the previous quarter, driven primarily by higher user growth and an uptick in transaction-based revenue. Transaction-based revenue in actual dollars was up from the previous quarter and represented 17% of total revenue in the third quarter, up from 15% in the second quarter and up from 16% in the year-ago period. The increase in the third quarter was largely a result of the Biller Direct resell agreement that Matt referenced earlier. Beyond the impact from the Biller Direct agreement, we expect the transaction revenue mix to increase slightly in 2019, as Q2 Open customers begin to generate revenue from the float and interchange fees, which will be reported as transaction revenue. This revenue will be more difficult to forecast because the pace of debit card production and adoption is driven by our customer's account holders. However, unlike bill pay transactions, I expect growth of debit card transaction revenue to be accretive to gross margins. Turning to backlog. We experienced a sequential increase of approximately $10 million, ending the quarter with just under $775 million in committed backlog. I would note the Q2 Open resell agreement signed during the quarter is only partially reflected in that backlog number. While the agreement has a 7-year term, the contract terms can be renegotiated after 3 years, and therefore, we have only reflected the first 3 years minimum commitment in backlog as of September 30. 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 53.8%, up from 52.3% in the third quarter of 2017 and 53.3% in the previous quarter. The sequential and year-over-year increase was largely driven by the impact of the Q2 Open resell agreement. Total operating expenses were $29.4 million, up 17% from 1 year ago, but up only slightly from the previous quarter. Research and development and general and administrative spending was up sequentially, which was largely offset by a decline in sales and marketing expense. The decline in sales and marketing expense was related to the timing of our annual client conference, which was held in April. Adjusted EBITDA was $5.7 million, up from $3.6 million in the year-ago period. The improvement was driven by the higher revenue and gross margin. We ended the quarter with cash, cash equivalents and investments of $298 million, up from $278.7 million in the second quarter. Cash flow from operations for the third quarter was positive $17.4 million, resulting in free cash flow of $16.4 million. Let me now turn to our updated guidance and outline the impact of Cloud Lending. We forecast fourth quarter revenue for the core business in the range of $64.9 million to $65.3 million, excluding Cloud Lending and $65.9 million to $67.3 million inclusive of Cloud Lending. Given the structure of Cloud Lending contracts and deferred revenue, the purchase accounting treatment will significantly impact the revenue recognition over the first 6 to 9 months post close, with the impact becoming less significant in the second half of 2019. We forecast fourth quarter adjusted EBITDA for the core business in the range of $7.1 million to $7.5 million, excluding Cloud Lending and $2.1 million to $3.5 million, including Cloud Lending. The revenue impact from purchase accounting I mentioned earlier as well as select investments we are putting in place to integrate Cloud Lending personnel and technology are driving the decline in adjusted EBITDA. While I expect those trends to extend into 2019 as well, I expect the impact to moderate in the back half of 2019 as the impact of the purchase accounting adjustments become less significant. In conclusion, we posted another strong quarter. We saw a sequential improvement in gross margins and generated positive cash flow in the third quarter. Despite lower adjusted EBITDA in the fourth quarter, I feel confident the company will post another quarter of positive operating cash flow, and I am optimistic we are positioned well for accelerated revenue growth in 2019. Now let me turn the call back over to Matt for his closing remarks.

Thanks, Jennifer. As you can tell, our business is evolving rapidly. We are entering new markets, expanding our capabilities and with the Cloud Lending acquisition, Q2 has officially become a global company. I want to reiterate that as we experience this growth, it's paramount that we maintain our focus on what has gotten us here, picking up the phone when customers call, installing new customers on or ahead of schedule and continuing to enhance and expand our product portfolio. With that said, I'm as excited as ever about the opportunity we have to continue leading our customers to the digital transformation taking place in the industry. I'm encouraged about our pipeline across all business units in the fourth quarter, and I look forward to closing this year strong. Thanks, again, for joining the call. And with that, I'll turn it over to the operator for questions.

[Operator Instructions]. Your first question comes from Tom Roderick from Stifel.

All right, I guess if I could start with just one question on how you're thinking about the pipeline going into the fourth quarter but more importantly, into next year. There's a lot of sort of macro crosscurrents that are swirling about out there and I mean if you go back a few years, Brexit, and then after that, the election, all sort of either put a little bit headwind in your face or a little tailwind in the back of it, but generally speaking, it's been great, great commentary on the pipeline and conversion rates amongst Tier 1, Tier 2, Tier 3. So as you're thinking about the fourth quarter but also thinking about going into next year, would love to hear just, Matt, if you've got some more qualitative thoughts about what's sitting there in the pipeline, timeliness of that, does this start to look like last year where it was a gangbuster fourth quarter? Does it feel like it'll be paced out a little bit more? Just sort of curious for your broader thoughts on that.

Yes, Tom. So coming off of a tough quarter to navigate Q3. Just we talked about it before, it's just - it's not a great buying quarter. We had a really solid performance, hit our numbers. It looks like Q4 is shaping up to be a solid quarter where we could hit or exceed our expectations. Your commentary is what we're watching closely as all of these different crosscurrents and the things that are going on. We've got one of them behind us last night or this morning I guess. And so that, I believe, will be a positive for us. I'm not a political scientist or any of that, but I do believe that will have a positive impact on us. We're watching closely in the '19. The '19 pipe looks good as well for us but beyond that, I mean, more color, those are pipes that we got to win in Q1 and Q2, but the pipeline looks good, the activity that I'm seeing from the financial institutions, the Fintech companies are very positive. We're also looking very closely at the Cloud Lending pipeline, which I have been very impressed with the activity we've received inbound from some of our customers and then also as I mentioned in the call, I've been around the world meeting with customers and prospects, and the activity seems to be up as well there. So we will, as always, give you a better update in February but right now, I feel good about our Q4 and our ability to execute, especially coming off of the Q3. And then '19 is shaping up to be a good year, but all the things you mentioned, we're going to continue to monitor.

Great. Okay, good. I wanted to turn my next question here to Q2 Open. You've had some nice announcements in the past few quarters and those sort of felt like building blocks. You put the pieces on the chess board and sort of wait for the game to come to you in the form of volumes. And now, we're sitting here with another 8 deals, and you signed a reseller agreement with a payments provider. So looks like even more pieces on the board, I'd love to hear what are happening with volumes with some of the pre-existing customers and partners that you signed up. And then from the perspective of your install base, banks that are looking at these NexGen tech solutions and saying, how do we sort of partake in that and maybe there's a chance to link our debit card or something along those lines, are you getting a lot of sort of inbound requests to sort of link Q2 Open over to some of those NexGen tech partners that you're signing up on that?

Yes, Tom. So on the Fintech volume growth, I mean, the only commentary I have prepared is the one I had last quarter around Acorns going from $2 million to $3.5 million. They released that information publicly. A lot of these Fintechs are very guarded with that information, and I want to make sure I protect that, but we shared that last quarter and I would say that, that trend continues with a lot of them. So we're continuing to see growing adoption with the Fintechs. And then as far as our customers, existing customers and even the bank and credit union in the pipeline that are looking at Open products, yes, I mean,, as I said on the call, the opportunity to go get deposits right now from Fintechs that don't have the ability to warehouse those, and then you can participate in the interchange and the float is very compelling. And whether it's a credit union or a bank, many of them are speaking to us about how they can begin to participate in this program, which will drive revenue for us as well, but it will also help our customers compete and differentiate. So that is one of the things that is beginning to be part of our conversation when the platform is out talking - platform sales reps are out talking about digital banking, they're now incorporating whether it's the Biller Direct stuff or the CorePro services to our existing customers for them to be able to begin to innovate rapidly, so that many of them are looking to throw up direct banks or banks focused on a targeted like a millennial or a sports affiliation or maybe veterans, and so we're able to help them with these products move faster into these spaces that they want to get into to collect deposits and then obviously, potential begin to generate some loan growth out of it as well with Cloud Lending.

Your next question comes from Sterling Auty from JP Morgan.

All right. So for my question, I want to start with looking at the expense and margin structure for the fourth quarter. And I know you're not guiding for 2019, but just conceptually, how do we think about going forward? The changes that were made in terms of our estimates, how much of that was just directly flat out related to the Cloud Lending acquisition versus any other investments that may be your stepping on the gas in terms of capitalizing on Q2 Open or any other items?

Yes, Sterling. So I think it's all 100% related to the CLS acquisition. If you look, that's one of the reasons that we split out our guide between the core business and CLS so that you could see that. The core business, we still believe, is tracking to exactly where we had said it was going to for the year. And I would also mention that Q4 impact to adjusted EBITDA from CLS is exacerbated by the fact that it's the first quarter post close, and any deferred revenue here - that comes from purchase accounting is always heavier in the first 6 to 9 months of the year. So I would expect that, that will moderate by the time you get to the back half of 2019. At this point, adjusted EBITDA for 2019, I think, we're a little bit early to give full year guidance for next year given that we're still in the early part of integration planning and marrying that with our 2019 financial planning. But what I am comfortable telling you is that I believe the floor next year, for adjusted EBITDA, would be no more than $20 million - no lower than $20 million, and that approximately 75% of that's going to come in the back half of the year after that purchase accounting adjustment becomes less significant.

That makes sense. And then for my follow-up question, you made the comment about the transactional revenue gross margins being accretive for the Q2 Open. And I'm just wondering how we should think about, structurally, maybe it's a little bit too early to completely tell, but whether you're willing to break it out quantitatively or qualitatively, what's kind of the rank order in terms of the gross margins platform versus Q2 Open versus traditional bill pay so we could think about directionally, the mix of where it's going? And as you think long-term, how much of the mix of the business do you think will actually end up on Q2 Open as we move years into the future?

So the margin on Q2 Open - obviously, Q2 Open is deployed completely in the cloud and doesn't have the underlying data center infrastructure costs, so I would expect over time, as that revenue grows, that it will be a higher-margin revenue business than the platform, just given that it doesn't have the data center infrastructure and cost related to it. But remember, it's relatively small compared to the overall, so it's going to take a while before it contributes meaningfully to margin growth. What I will say on the Biller Direct in particular is transactional revenue, it will increase our transactional revenue but unlike bill pay, which has the third-party pass-through costs, it's an internal product, it doesn't have any of those. So I would expect the margin on the Biller Direct business to be closer to our subscription margin at about 60%. And how much higher it can grow would be determined on the adoption by account holders and how much they utilize because it's really that interchange and float that Matt mentioned in the prepared remarks that has very high margin. So as consumers adopt these debit cards and utilize things like Biller Direct and CardSwap, you could see that access really draw the revenue up or the gross margins up over time.

Your next question comes from Brian Peterson from Raymond James.

So I just wanted to hit on booking seasonality a bit. So traditionally, the fourth quarter has been the biggest quarter for bookings, and then that's followed by the second quarter. As you launched Q2 Open and now with Cloud Lending, does the seasonality for bookings change at all? And as we think about bookings to revenue time line, how should we think about the impact of Q2 Open and then Cloud Lending?

I'll take the seasonality, and Jennifer can take the how it hits revenue. On - from a seasonality perspective, you are correct, the Q4, Q2 are typically the bigger quarters in the platform business. As I mentioned earlier, we have a solid Q3, but that's typically a tricky quarter to try to predict. On the open side, it's so nascent that it's growing every quarter for us as we talked about from the pipeline is growing and so is activity. So I think it's too early to talk about what that - what the seasonality of that is because it's a very new space. As far as cloud goes, that's a new space as well as far as - it's greenfield. And so I'm not quite there yet, Brian, on what the seasonality of it's going to be. I would say, in North American banking, which we think is a huge opportunity for us, I would expect it to follow in the same seasonality because those are as much buying trends or the rhythm of the business and when they can actually make those transactions. So I would - thinking North America, it would, but I'm just not comfortable yet talking about EMEA, ANZ and Asia on the timing of those pipelines, but I will continue to monitor it, and we'll update you as we progress.

Yes. And on the time to revenue on the Cloud Lending stuff, right? Their revenue model is a bit more complex than Q2, given that they have various lines of business. For example, leasing and AltFi as well as the opportunity we think that we have to bring them into the North American banking market. And they also use systems integrators in certain geographies. So in the AltFi or leasing space, I would expect that those turn to revenue fairly quickly, say, within 90 days. However, if you look at moving into the North American banking space, I expect that to be similar to a large Q2 platform cross-sell and take approximately 6 months to convert to revenue.

Got it. And maybe just following on to Sterling's question on Cloud Lending. I appreciate the color on the fourth quarter impact, but it sounds like the moderating impact on margins, you referenced the deferred revenue. I'm just curious, are you thinking about a sustained kind of sales and product impact or a product investment there, so maybe we should really think about a little bit of a margin hit as we ramp through even 2019 and 2020?

Yes, I do expect it to be dilutive to the margins for probably the next 18 to 24 months, as we invest in that product and continue to put the infrastructure in place for them to be able to operate. However, again, I would mention that Cloud Lending is also deployed in the cloud, right there in the sales force cloud, and so they don't have the underlying data center cost and infrastructure. So I think after the first initial investment to support the product and put the infrastructure in place around their implementation processes, et cetera, that it will be accretive to gross margins in the longer term.

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

I was wondering, in the context of Cloud Lending, some of these initial discussions, I think, Matt, you mentioned, having some workshops with customer. Do you have a feel at this point and maybe compare the Tier 1s and larger customers to smaller ones, what is their online lending strategy at this point? How many of them have a solution versus looking at your solution and what other alternatives are they potentially looking at to exploit this opportunity?

Yes, Joseph. Right now, whether it's the Tier 1, Tier 2, Tier 3, there's very few that has a, what I would call, true online loan origination platform. And the ones that do, they're usually legacy and they don't work very well on mobile browsers, and it's not a very good borrower experience. And so it's greenfield in all of those different spaces. Now you got to remember the volume on a Tier 3, the number of loans they do and the volume is vastly different from those of the Tier 1s, and so we continue to - the workshop, that's one of the things on the workshops we've been working through is what asset category you want us to invest in. And then how - and then what's the most common and how we go build it out that way. So that's kind of been the approach as we look through these workshops to figure out what's the best way to integrate, and that's in the U.S. Now, from a leasing perspective, what we're seeing, whether it's AltFinance companies or equipment leasing companies, there's a tremendous amount of work that's been done there, and we are doing very well in that - in those categories. As far as the competitive space, it's mostly old processes, legacy systems. There are some companies that - some started a little earlier than us and some have started about the same time, we feel like that Q2 and Cloud coming together is highly differentiated, and we're beginning to see that by the inbound activity. But I think you're going to see initial successes come out of the North American banking market, and we'll continue to keep you updated on those. We've got some good progress already. After you announce an acquisition everybody wants to kind of find out what your intentions are with that, and we were able to go out and talk about how we're going to continue to invest in the platform and the people and then continue to keep the culture as it is and just try to continue to build the business. So it's a very good spot to be in where we feel better today than we did the day we announced it. So that's a good sign that we continue to feel good about the people, the technology and the talent.

Okay, great. And any updates on integration and implementation schedule on the large amount of business you won early this year? Is there any change to the cadence there of getting all of those new customers online?

No, I don't think there's any change to the cadence there, the things that we've talked about. The one thing I would say is the ones that were signed last year in 2017, you're starting to see those come online here at the end of this year. In fact, that was a direct result of our overachievement on Q3 revenue. We were able to pull a couple forward out of Q4 into Q3 and late Q3 to pull some revenue forward in the year, but those are all on schedule as well.

Your next question comes from Matt Hedberg from RBC Capital Markets.

Congrats on the closing of Cloud Lending. I think you mentioned last quarter that it - that, that business was growing faster than Q2 was and obviously, I think you alluded to $1 million to $2 million of Q4 contribution. I'm wondering, Jennifer, could you give us a sense, it may be minor, but what the purchase adjustment - purchase accounting adjustment you made to that? That might give us a better sense for like a true Cloud Lending run rate in the next year?

Yes. We're still in the middle of the independent third-party valuation in exactly how the purchase accounting and purchase price allocations are going to work, but we've kind of estimated at this point that we are going to have to take a deferred revenue haircut that's really concentrated in kind of the first 6 to 9 months post close. That's fairly significant. So next year, after the purchase accounting adjustment, I would expect the CLS revenue to impact low double-digit millions for 2019 from CLS.

That's super helpful. And then the competitive environment, obviously, you had another Tier 1 win this quarter. I guess, an earlier question was asking about sort of the overall selling environment, can you talk about the competitive environment. Have you noticed a change from core processors, and are they capitalizing on a rising rate environment as well? Just sort of wondering about if you can give us an update there.

Yes, Matt. When we talk about the competitive environment, I want to make sure that we're distinguishing on the - because of the growth of the business in the different lines that we have. From a platform perspective, the competitive environment is very similar to where it was and the cores are investing and trying to build new products, but we're doing the same thing, and I feel like we do it at a pace that's a little faster than those guys, and we're going to continue to try to extend our lead. There continues to be start-up activity mostly on the retail side or midsized companies that are on the retail side that we are competing with. Like as I mentioned, we had a solid Q3. When I look at the win-loss report, we're still winning 50-plus percent of the deals out there. This is 5 straight quarters of Tier 1, so I feel good that we're going to get that Tier 1 or 2 in the fourth quarter. So the competitive environment continues to play out very well for us on the platform side. On the Open side of the business, there it's so new, and we - it really feels like we are competing with a serious advantages out there because of the number of Fintechs that we worked with, some of the names we've mentioned and some that we haven't, but our experience and our execution and ability to deliver is really differentiating us, and that's one of the reasons we're so optimistic on the Open side. And then Cloud, we've talked before, it's a lot of greenfield, legacy processes, spreadsheets, and then there's new players coming up just like us, and we just feel like where we are as a company and the experience we've had building a company, like we did with the Q2 platform, that we're going to be able to help Cloud navigate that and maybe avoid some of the mistakes we made.

Your next question comes from David Hynes from Canaccord Genuity.

So I wanted to ask about Cloud Lending just from a go-to-market and implementation perspective, is the decision maker the same inside a regional bank that you're accustomed to dealing with, if you sell a lending platform? And then on the implementation front, is this something you feel like you can stand up quicker than a core digital banking implementation or is still pretty involved process in terms of integration requirements into other systems?

Yes, so the decision maker - let's just say, the decision-making committee is different than what you're going to see on the platform side. So that's for us, it gets us further into the bank if you think about by getting the Cloud platform in there. We're going from the deposit side of the house to the loan side, so it's a different committee, but at an executive level, which is where we're trying to drive these sales, it's the same people. So it could be Chief Operating Officer, CIO, the Head of Digital Strategy. So there is some leverage we can get out of the relationships, but it's going to do be a different group of people that are going to make that decision. As far as the install, it really depends on the size of the organization and how much of the platform they want to take, the lending platform, and what asset classes they want to do. They have examples of standing the product up in 6 to 8 weeks, and we're trying to build more models like that where we can do it faster. But then there are some that take longer because the customer has a much broader vision of what they are trying to do, but at this point, there's multiple models that we're rolling through. Obviously, we're trying to get as much efficiency out of the implementation process as possible, because I think - we think we can differentiate off of that by being able to deliver a more off-the-shelf product. It's highly configurable for people, and that's one of the things we're working hard on right now to do.

Yes. Okay. And then maybe as a follow-up, kind of a higher-level question, I guess that maybe same-store sales growth. Can you give us a sense, Matt, for where you think your digital banking penetration is kind of within your customer base? Investors Tier 1 wins are very important, but it seems to me like there's still a pretty good runway, scaling registered users inside of the customers you have, right? So where do you think we are in terms of digital banking adoption side of the customers? Is there a difference between your bank customers and your credit unions? And then if you look at the big money center banks, I mean, how does the percentage of the customers kind of on digital platform inside of your customers compared to what you see at the bigger banks?

Yes. So let me take the last part first, and I'll work my way down. So if you think about Bank of America, Wells, Chase, they're all running at 90-plus percent adoption on mobile and desktop. That's a function of it. You think back to '99, 2000, if you call Bank of America and ask them to do something, send me a statement, they would say, did you know you can do that online, and they would push you in the call centers to go to the online channel to do that. 2007, '08, '09, they began to push you, did you know you can do that on a mobile phone, until they've had in their DNA to drive you to the digital platform for years. And for different reasons, banks and credit unions have had different approaches to that. They didn't want to give some of that contact with the member or customer up. And so therefore, what you look at is credit unions typically do a better job of more customer adoption and they are more probably in the 60% of their account holders range have been - have adopted the platform. And then on the bank side it's probably between 50% and 60% where we see adoption. So there's a tremendous amount of room for us to continue to drive adoption, and we're working with our customers to do that through marketing campaigns or even the call centers, like I mentioned, Bank of America does that somebody calls and asks for a check, tell them they can get it online and sign them up. And so that's where you see it, and I think you hit the nail on the head. There's a lot of opportunity for just internal growth within our customer base so they can get more customers using it.

Your next question comes from the line of Terry Tillman from SunTrust.

This is Eric on for Terry. Another question on Cloud Lending, looks like there's some good early interest from customers and now that you have more time to analyze the opportunity and synergy opportunities on the revenue side, can you just talk a little bit about what you guys see as the total - how this increases your total TAM?

Yes, we've been working on that. I think when we had talked about it, in general, we think from a rough number, it's $2 billion to $2.5 billion, is what we think it is, and that's - those are tough numbers to come to. We've been pretty conservative with TAMs. If you think about it, we came out with our TAM in 2014 at $3.5 billion for the platform, that doesn't include Corporate Banking, it doesn't include Q2 Open, clearly doesn't include Cloud. So I would probably make the case that it's probably bigger than $2 billion to $2.5 billion. But it's - it represents a significant increase in our TAM. And I think it's going to be, if you think about when I look at it just within our customer base, I think it's probably going to become our biggest cross-sale on the platform that we've got from a dollar perspective here in the next 6 to 12 months, and that's one of the things we're working towards. It adds so much value to the financial institution as far as their ability to move an account holder to become a borrower and move a borrower to become account holder, sticker, drives more utilization and more - you get data on those customers, so you can use SMART to cross-sell products. So it's a tremendous opportunity, and we'll continue to work on defining the TAM as we look at the opportunities from a global perspective.

Your next question comes from Larry Berlin of First Analysis.

First question on the revenue side, what do the banks do, and how do they work with you, you just mentioned a couple of them, to expand users, especially in a transaction of debit card product, are they showing huge commitment to getting their consumers to adopt?

Well, yes. If you think about, whether it's a Fintech or a bank, the utilization of the debit card or credit card drives interchange revenue for them, which is certainly, something they're hungry for. So yes, they are hungry to do it but also, when you think about the volumes of millions of people using these debit cards, you have to have it right. So there's a - so far, we've seen a long process in getting that ramp-up ready to go and to make sure that they get it right. And when they flip the switch and turn it on to everybody, that's when we'll have more data on with those numbers will look like, but we just - we're trying to manage those expectations like we've done forever. So we'll continue to do that, but it's - it is something that they are eager to get the debit cards into production so that they can start to generate revenue off of them.

Okay. Then just switch gears for a second. And the increase year-over-year in R&D, I'm just curious what the internal R&D focus is at this point?

Well, Larry, I think, for us, obviously, coming off the Cloud acquisition, integrating Cloud into the platform is going to be a focus, driving - as we talked about, you haven't seen it, our announcement of our financial experience, or FinEx, as we call it, we're driving to drive more openness in the platform through SDKs and APIs. We're also driving more data into the platform so that we can use that with our Q2 SMART product, and we're trying to be - have design thinking. We're problem solving when we're building these products for our customers. So we're trying to get away from this idea that you log in to the - for 20 years, we've logged into Internet banking, you've looked at your balance, and you clicked down to see the account history. What we're trying to do is to drive an experience where it's Tuesday, the second day of the month, this is usually when you pay your AT&T bill. Do you want to pay that today when you log in. You also - looks like your cash flow is up, would you like to move some of that money to interest-bearing account? So that's how we're trying to view. This is all where our roadmap is taking us. And then, obviously, on Q2 Open, we're trying to driving more and more innovation through the CorePro product as well as of the Biller Direct and CardSwap products.

Your next question comes from Brad Berning from Craig-Hallum.

I wanted to follow up a little bit more on the Q2 Open competitive positioning a little bit. And just - you talked about differentiating yourself in the market but just help us understand how you go to market? What is your pitch on differentiation? And where do you see your strengths, and what kind of sectors are you winning in versus where are the areas that you're not winning in? And just help us understand a little bit in this. Obviously, it's early days in the changes in distribution for financial services, help us understand your positioning within that?

Yes. So we are in a network of people that generate the Fintech opportunities for us. This is not the banking side. So we have a network of people that, whether it's through financing or through legal or through banking rules, where these Fintechs come to us or we reach out to them via our direct sales force And then in that process, they will talk about, we are trying to create a user experience that is this to capture eyeballs and customers, and then we work through, okay, as you begin and they're trying to bring in deposits, as you bring these deposits in, you're going to have to have somebody to warehouse those, that's compliant and meets the regulatory standards. We happen to have 400 banks and credit unions that want to participate in this. And then the next phase is how long it's going to take you. Well, we can you in sandbox and you can begin to developing on it in two weeks, and we've got plenty of customers as references to do that. So that's the sales process, in a nutshell, what goes on. I'm sure the sales reps would have a lot more to say. It is lot more complicated than that. And then from a competitive perspective, we haven't seen anybody that has all of those pieces. And then on the bank side, you go into a bank and say, similar conversation, you want to create a savings account or a debit card program for millennials. Here's the look and feel you want at the front, or they have already built that look and feel, you may have a company in there consulting on their digital transformation, and we plug in the CorePro product in two weeks. They're writing to it, and they're beginning to put those workflows out there and then begin thinking about marketing it. The time to market is a huge differentiator for these customers - for the banks that we're - and credit unions that we're talking with because they are trying to get this out as quickly as possible. They watch TV, they see commercials for AMEX they see the commercials for Capital One, Ally Bank, the rest of them. They're trying to get products out there to compete and time to market, it's in the cloud, you can do it quickly, we don't have the big minimums up front, you pay for it, you put the users on, and we'll participate in your success together. So that's the Fintech and the banks are those of the two. And those are the two sectors we cover, Brad. it's there may be some opportunities with - there's been some large corporations that've reached out to us about beginning to do things to warehouse deposits but really, it's Fintechs and banks, and we'll continue to explore other sectors. But right now, that's where we've got more than we can say grace over.

Yes, no, that's very helpful. And then the one follow-up on that is you've been in it for a while now. You've got enough customers now, and I think originally, kind of, on pricing type models for you guys, you wanted some more time. Where are you at in kind of understanding the value-add you have in your ability to charge for that? When you think about the total economics like in interchange, how are you able to participate and what portion of this are you an amazing ROI for everybody, and there's opportunities to gather more of economics? Just help put some perspective around what share do you get out of this pie?

I got to be cautious on what I say here. I will say that everybody has a different strategy when they're coming with this. It could be, they want to drive more debit card, it could be float, it could be different things. And so we believe that our platform, our experience and our network of banks and the ability to distribute deposits is highly differentiated, and we believe that the value of debit interchange, some of these things, sometimes they're more valuable, if you think about working with a financial institution below $10 billion in assets, they have higher interchange rates. So there's more money to be split up in those environments. So giving up the percentages is something - it's too - it's confidential and also something I don't really want to give up, but Q2, Fintechs and banks are going to participate in this and something that we all think, we all add value in the transaction as a partnership, and we're going to continue to drive more utilization out of that. And so it's - I'm trying not to be cool here. It's a lot of opportunity here, but I think everybody has a different approach to which ones they want, and the important thing to know is we're participating in a very large opportunity with debit interchange, float and the subscription fees for using the platform as well.

There are no more questions at this time. This concludes today's conference call, and you may now disconnect.