Good morning. My name is Christa and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings First Quarter 2019 Results Conference Call. All lines have been placed on mute to prevent any background noise and after the speakers remarks we will have a question-and-answer session. [Operator instructions] I will now turn the conference over to Josh Yankovich, Investor Relations Specialist. You may begin.

Welcome to the Q2 Holdings conference call for the first quarter ended March 31, 2019. I'm Josh Yankovich, investor relations specialist. And with me today on the call are Matt Flake, our CEO; and Jennifer Harris, our CFO. As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available on our website following the call. By now, you should have received a copy of our press release that was distributed yesterday afternoon. If you have not, it is available on the Investor Relations section of our website. Before we begin, I would like to thank those of you, who attended our Investor Day in New York earlier this year, and note that for those of you unable to attend, a recording of the webcast is available on the Investor Relations section of our website. Before beginning, we must also caution you that today's remarks, 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 forward-looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission and the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward-looking statements. During this call, we'll be referring to both GAAP and non-GAAP financial measures. We believe that non-GAAP measures are representative of how we internally measure the business and they're reconciled to GAAP in the tables attached to our press release, which is available on the Investor Relations portion of our website. 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, a reconciliation is not available on a forward-looking basis without unreasonable effort. Let me now turn the call over to Matt.

Thanks, Josh. I'd like to start today's call by talking briefly about our first Investor Day, which we held on February 28th, before sharing our first quarter results and some highlights across the business. I'll then turn it over to Jennifer who will provide a more detailed look at our first quarter financials and provide guidance for this second quarter and full year 2019. Thanks to those of you who were able to attend the Investor Day presentation. For those weren't, I'd like to quickly cover what we shared and reiterate why we felt it was important to provide an update on where our business stands today as compared to the time of our IPO in 2014. At the time of our IPO, we were a virtual banking provider with 3.1 million end users across our 334 customers, operating exclusively in the U.S. bank and credit union markets. Since then, we have meaningfully expanded our market opportunity by growing our product portfolio organically and through strategic acquisitions. Most recently, with the additions of Gro, a digital onboarding solution; and Cloud Lending, a SAAS end-to-end lending and leasing platform. We completed both of these acquisitions in the fourth quarter of 2018. These acquisitions combined with our previous organic and strategic investments have equipped us to not only better pursue our primary market, but have also opened up – opened us to new customer segments and international geographies. All the while, we've continued to scale our digital banking platform business, growing to support over 13 million end users across more than 400 banks and credit unions. In 2014, we had one customer with more than $10 billion in assets, and I'm proud to say that today, we have more than 30 customers that exceed $10 billion in assets, a testament to the…

Thanks, Matt. We're pleased to have delivered first quarter revenue that exceeded our guidance and strong bookings across the board. Let me start by reviewing our results for the first quarter, before finishing with updated guidance for this second quarter and full-year 2019. Total revenue for the first quarter was $71.3 million, an increase of 30% year over year and up 6% from the previous quarter. Our increased revenue in the first quarter was the result of growth in subscription and services revenue. Subscription revenue growth was driven by a combination of organic user growth, customer go-lives in the quarter and a significant sequential increase in revenue contribution from the businesses required in the fourth quarter of last year. Services revenue also benefited from new customer go-live on the digital banking, lending and leasing platforms in the combined businesses. Transaction revenue represented 16% of total revenue in the quarter, consistent with the prior year and down slightly from 17% in the previous quarter. As we turn to gross margin and operating expenses, let me remind you that unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis. Gross margin was 52.3%, up from 52% in the previous quarter and down from 54.3% in the first quarter of 2018. As a reminder, the first quarter of 2018 included approximately $2 million of revenue related to the adoption of ASC 606, which contained very modest incremental cost given the majority of it was merely related to the timing of the revenue recognition within the year. Without the benefit of the ASC 606 timing adjustment, gross margin would have been relatively flat year-over-year, influenced by the purchase accounting adjustments related to our recent acquisitions, as well as the investment we are making to integrate those acquisitions. This…

Thanks, Jennifer. In conclusion, as we shared at our Investor Day in February, Q2's business has clearly evolved since our IPO in 2014. We have expanded our capabilities considerably, and our market opportunity has expanded to include new segments and new geographies as a result. I'm pleased with our execution across these new markets, geos and product lines as demonstrated in the first quarter. And given our pipeline and execution to date, my outlook for the rest of 2019 is equally positive. As Jennifer and I both mentioned today, we plan to continue our investment in key areas of the business, like Corporate Banking, Cloud Lending and Q2 Open, to fuel the opportunity we see across our markets. Finally, as we prepare for our annual client conference next week, my focus is on spending time with our clients to ensure that we remain strategically aligned and focused on the things that matter to them. I look forward to sharing some of their feedback with you on our second quarter call in August. Thank you, and with that, I'll turn the call over to the operator for questions.

[Operator instructions] Your first question comes from the line of Sterling Auty from JPMorgan.

Yes, thanks. Hi, guys. First, quick shout out to Josh, great job on the first call. Bobby would certainly be proud.

Thanks.

Let's start with – actually Jennifer, let's start with the investment that you're making and thinking about the margins for the year. We had a couple of different moving parts. We had the investment being made in the new acquisitions, you do have some accounting impact. I wonder if you can just give us a little bit more attribution in terms of, even if you don't go to specific dollars, just rank order, what are having the biggest impacts in terms of the margins for both June quarter and for the full year.

So I think you've got a couple of things on the gross margin line and cost of sales and that's the investment that we're making in infrastructure and folks to be able to deploy the new Cloud Lending and Gro solutions, as well as our continued Tier 1 successes that we've had on the platform business in a timely manner. And also, on that line, you got increased regulatory costs with the evolving regulatory environment around. Now that we're international having GDPR compliance and then all of the privacy stuff that's coming out, both internationally, as well as here in the States. And then I think you see it on the development line and that's strictly related to the increase in the investment to continue to integrate the new products that we've brought on board over the last couple of quarters, as well as continued investment in the corporate product as we're continuing to see strong corporate traction with probably 9 to 10 of our net new deals including corporate during the quarter, as well as a good number of cross-sells of corporate. And then in sales and marketing to make sure that we are capitalizing on this opportunity that we're seeing in this digital transformation and the acquisition of Cloud Lending and the traction that we're getting with that product.

Sounds good. And then my follow-up is for you, Matt. Given some of the macro things that are happening, is there any change in terms of the tone that you’re hearing from your core customers? Certainly sounds like you’re have an opportunity talk about selling more products initially than what you have in the past? Is the spending environment from their perspective as robust as you have seen it?

Yes. Sterling, I would say that obviously, the interest rate environment has been not fantastic for them for quite a while. They are trying to manage their expenses, but this is not the area where they can go cheap and they’re going to have to continue to invest in it. I think what they’re trying to do is to figure out the other places where they can cut cost in order to continue to buy technology. But the conversations we’re having out there are positive with the bankers. It’s just a matter of the stress on the interest rate environment is obviously weighing on them, but we continue to see – if you just look at the quarter, all the activity that we had, when I look at the pipeline, I feel really good about the buying environment right now for all products.

Got it. Thank you.

Thanks, Sterling.

Your next question comes from the line of Tom Roderick from Stifel. Please go ahead. Your line is open.

Hey guys, good morning. Thanks for taking my questions. So I kind of want to talk just more broadly about go to market here. And then I can’t help but notice that the discussion highlighting, Matt, where you talk about a record Q1 bookings quarter, it’s so much broader than it used to be. So more product, more opportunities, not as much emphasis on, did you win a Tier 1, did you not win a Tier 1, that type of thing. So when you look at the go-to-market strategy, I guess, the question is, how much do you have to sort of change the training, change the way you’re going to market and in the structure of the organization? And then when you look at the opportunities in terms of cross-sell, how much is the dollar retention gain sort of improving in how much more can it improve from here?

Yes. Tom, on a go-to-market piece, it’s – we’ve really put a lot of time into – in the first quarter in training and educating the sales work, relationship management team, and that’s both the cloud, the Q2 Open in the platform side of the business. I mean, to your point, if you think about it, we announced a Tier 1 win on the corporate side of the business with corporate banking. We had Q2 Open, which sold the CorePro product in conjunction with Gro product and our digital banking platform to a $5 billion financial institution. We had Gro sign an $8 billion bank on a stand-alone basis. And then we also referenced a Tier 1 bank that signed up with us in January to do a direct bank. And so that involves almost all the sales teams working together and coordinating on selling these products. It’s still early, but you’re starting to see a bank or credit union will come in. And we’ll do a presentation on the platform, we’ll bring the Gro in – Gro team in to do a presentation and then the Cloud Lending team will come in and do a presentation. So we talked about cross-pollination in the call and how all those deals have kind of come together very well. But I think the sales organization, the solutions consultants, the relationship managers are getting better faster than I probably anticipated learning about these products. I think because they’re excited about the ability to sell more of these things and make more money. So we haven’t made many structural changes. If anything, we’re getting a lot of leverage out of the sales organization. It’s just making sure that we’re sticking to on our knitting on what our products can do and then also combining that with where we’re going to take them. Jennifer, do you want to talk?

Yes. And on the retention piece, Tom, I would say, just keep in mind that the more products that these customers put in the ground using our platforms, the stickier they become. So I think retention just increases from that perspective. But if you look at last year, on our trailing 12-month revenue retention was 114%, and given the strong momentum we’re seeing within our existing customer base around the new things like Gro and Cloud Lending, I would expect that to trend up slightly. I’d like to get a couple more quarters to see exactly what closes and if we can get them live before the end of this year or that increase comes next year, but I certainly do believe it helps us increase that number.

Outstanding, okay. And then, Jennifer, just a quick follow-up on the EBITDA and the investments, relative to the timing, it seems like there was a decision in quarter here to say, let’s accelerate some investments, particularly on sales and marketing side. So interesting to see that you guys beat the guidance handily on revenue. EBITDA came in a little light. Can you just talk about were there any just onetime inputs? Or was this a decision in quarter reflective of the demand environment that you saw out there and kind of step up the spending even in quarter and really – and we really put your foot on the pedal for sales and marketing spend?

No. A big chunk of it, as I mentioned in my prepared remarks, was actually the timing of payroll taxes. So we had approximately $1 million of unexpected payroll taxes in Q1 and it was related to both the increase in our stock value and thus the amount of value that folks received upon Q1 RSU vest that we then had to have employer match taxes on, as well as a combination of with the high stock price that we had toward the end of Q1, we actually had an unusually high number of non-qual option exercises, which also carry an employer match tax at the time of the exercise. And so we had about $1 million of payroll taxes that we were not expecting in our original guide. Our original guide was $1.2 million to $1.8 million. And so if you factor in the payroll taxes, it takes us just above the low end of our guide. Still $300,000 or so below the consensus, but that is really related to the investment and the accelerated investments in sales and marketing and R&D that we talked about related to the Cloud Lending, strong start to the year. And so yes, I would expect – and as part of the reason the full year didn’t change because the payroll taxes should be timing, it just pulled it forward, but now people will hit their cap on Social Security withholdings earlier in the year, so you should see a turnaround in the back half of the year, primarily in late Q3 and early Q4.

Excellent. That makes perfect time. Okay, I’ll jump back in queue. Thank you guys, great job.

Thanks, Tom.

Your next question comes from the line of Brian Peterson from Raymond James. Please go ahead. Your line is open.

Thanks for taking the question and congrats on the quarter. So Matt, I’m curious on some of your newer product offerings. It sounds like that was really strong this quarter. I’m curious, how much of that was the cross-pollinization that you referenced. And what were the new logo trends versus your expectations on some of these newer products?

Yes. I would say that the $1 billion bank that bought the cloud product was probably a little ahead of what I would have anticipated getting done, so I was encouraged by that. I look at the pipeline as we move forward for the Cloud Lending cross-sale in the North American banking and that pipeline continues to grow. The transitioning on the Gro point – Gro business, obviously, we’re happy with them signing that large deal, but we’re also starting to incorporate that into almost every new sale on the platform side, as well as on the cross-sale. We mentioned the client conference. I’ll give you – I’ll be able to give you a much better feel for how these products are shaking out within the platform team as we’ll have about 1,000 customers or 1,000 members of our customers at the conference. And so I’ll have a much better perspective on how they’re feeling about the product and what they want. But even – we’ve got a Q2 Open customer that’s looking at Cloud Lending now. Those are things that I didn’t really anticipate. And so the product mix and the new logos, whether it’s the Tier 1s, we had a really solid – had some really solid credit unions in banks on the platform side. So on the Q2 Open side, it sounds one of the largest Fintechs in the world. And then we signed – in Asia, we signed one of the most interesting Fintech deals we’ve done before. And in Europe, we had a couple of really nice wins with AltFi bank and on the leasing side. So really happy across the board with the performance of the team and the ramp-up of the products and now we’ve just got to go deliver on.

Thanks, Matt. And just thinking about the international diversification and the product diversification, does that change the seasonality of bookings overall? I know typically, the second quarter and the fourth quarter have been the biggest. You referenced the record bookings activity in the first quarter. Just curious how that bookings mix and seasonality changes going forward. Thanks, guys.

And, Brian, I think that the seasonality piece is – I think it should normalize the quarters a little bit more. I – we still don’t have enough track record of owning the business to tell you what the quarters are going to look like in Asia, Australia and Europe. But I’m hoping it flattens it out. I would just say that one of the things that just to put a caveat out there on the second quarter is, I really think the team outperformed in Q1 and brought some deals in from the second quarter. The other thing I’d say is that with the client conference coming up, typically, that was usually in early April and for just logistical reasons, we moved it to mid-May. And a lot of times, you have banks and prospects that hold up their decision-making to go to the client conference. So I'm confident we'll be at plan at the halfway point of year, but I do worry a little bit that some of the deals we pulled in early in the client conference could push some stuff to July outside of the quarter. I still feel great about the pipeline. I'm, I guess, I always want to put a caveat out there that with the client conference, it's always a good thing we have those, but it could put a little noise into the second quarter, but it – we'll get it in the third if we don't get it in the second. But I think we'll be on plan, I always want to make sure that we are transparent about some of the things that are going on in the business.

Your next question comes from the line of Peter Heckmann from Davidson. Please go ahead, your line is open.

Hey, good morning, everyone. Thanks for taking the question. Jennifer, could you tell us what was the actual acquired revenue in the quarter? And what level of acquired revenue are you incorporating into your full year guidance? I'm assuming something like $12 million to $13 million from the two acquisitions.

Yes. So the revenue from the acquired businesses in Q1 was about $3.5 million. So that less the organic use or the organic growth of the underlying business at about 24% quarter-over-quarter and – sorry, year-over-year. And go forward, you're right. I would expect, we've said in the past that Cloud Lending will be in the low double-digit millions. I think that's still accurate. And I would guess that Gro is going to be somewhere between 1% to 2% of total revenue.

Got it. That's helpful. And then you talked about free cash flow going negative in the first quarter. Could you just update us on your thoughts for second quarter and full year?

Yes. I think with the timing of the investments and the accelerated investment that we've talked about, I think free cash flow and also the timing of CapEx adds, I think free cash flow in Q2 is likely to be negative as well. And then whether we're breakeven, slightly positive or slightly negative at the end of the year, really depends on the timing of when we sign the deals in Q4 because the cash flow is highly dependent on the collection of the upfront deposits upon contract signing. So to the extent, contracts are signed late in Q4 and we don't have time before the end of the year to collect those deposits. Those could shift into Q1. To the extent that we get those deals signed earlier, then we have the ability to collect those before the end of the year and have a positive impact. So at this point, I think we're trending toward breakeven or slightly positive for the full year, but if we can pull the timing of deals in, we could possibly be positive.

All right. That's helpful. Thank you.

Your next question comes from the line of Matt Hedberg from RBC Capital Markets. Please go ahead, your line is open.

Hey, guys. Thanks for the questions. And first of all, congrats on all the cross-selling. That's – it's got to be really exciting for you guys. I guess when you think about realizing each of your solutions in your really broadening – broadened portfolio have different times to deploy, as you guys continue to have success with Tier 1 wins and cross-selling, as you alluded to on this call, can you talk about what you guys can do to, I guess, more broadly increase the time to deployment here? Or I guess I'm just wondering on – obviously, the digital banking site takes a little bit longer, but just really curious on any improvements there.

Yes. I think as we talked about on our Investor Day, Rekha came on and she talked about she's trying to drive efficiency through automation of the delivery of the products. Now all these products have different times of delivery and different things that are happening and different importance. We did reference the $20 billion bank in the Northeast on cloud that signed in the fourth quarter and is now live on the product today, which is pretty fast for them. They literally sent us a note the other day that from funding – from application to funding, their first loan was around 10 minutes. So that's pretty fast in the market. But I think what you will see is, in general, people, when the sign up for a digital banking conversion are looking at six or12 months, depending on the size of the entity. And they structure their organizational readiness around that timeframe. What we're trying to do is to allow a team that may be able to then carry three go-lives at a time to be able to handle four or five, and we're speeding it up. A lot of times, it's not what the customer wants because they have other things they're working on other obligations. And so on the platform side of the business, I think you're really seeing a lot of the stuff Rekha talked about at the Investor Day beginning to pay off. It takes some time to get that a team trained up and to get as part of the process. But I think you'll begin to see scale in the amount of go-lives that our teams can handle. On the cloud side, there are systems integrators involved, there is – we have direct delivery of it as well. And that's – those…

That's great. And then, obviously, the Cloud Lending deals in EMEA and APAC, again, that's super exciting for you guys, and I think, you mentioned the ability to play on top of CRM in that case. Broadly speaking, can you kind of help us with how you think about targeting broader success internationally, I guess, first with Cloud Lending and then maybe even Gro or some other pure digital solutions?

Yes. Right now, we are in focused areas, right? So really focusing on the UK and the Netherlands, just because we have some pretty large customers there in that area, we – right now, I want to make sure we continue to win in North America. So I'm not ready to distract the organization to take the platform over there. But Gro and Q2 Open, we have had interest from challenger banks and Gro from an onboarding perspective could be in the places, whether it's Australia, Asia or Europe, where we could begin to cross-sell some of those products. But we want to be very intentional and focused in how we go after those markets. But we believe that delivering on what we're selling in Europe and then in Australia, we'll end up building strong relationships with these customers. And our ability to do expansion selling within the existing ones of other cloud products, whether that's other asset classes or cross-selling, some of our other products are opportunities for us down the road.

Thanks. Congrats guys.

Your next question comes from the line of Bob Napoli from William Blair. Please go ahead. Your line is open.

Thank you and good morning. Question around the three newer products, if you would: Cloud Lending; Q2 Open; Gro; which of those, Matt, do you expect to provide the most material effect on revenue growth over the next few years? And Jennifer, do they potentially put upside pressure on your long-term target gross margin of 65%?

Yes, Bob. Thank you, and welcome to the call. I would say Cloud and Open are – they're different, but they're very similar from the sizing perspective, and I think they will probably – it depends on how it plays out, but I think they will probably be equal, very close contributors from the revenue perspective. The Gro side of the business is – I don't think it can be as large as those companies, but I think it's a critical part of digital onboarding is whether it's the direct banks I'm talking about or a borrowing customer, digital onboarding is a big part of it. So I think it's an important part, but not going to be the same contributor from a revenue perspective that Cloud and Open are going to be.

And on the gross margin, you're exactly right. Those should provide some positive upside to our long-term gross margin targets. Obviously, they're much smaller piece of the business right now, so it's going to take a while for them to make that contribution. But all three of those products are deployed in the cloud, whether it be on force.com, or on AWS or Azure, but they are all deployed in Cloud, so they don't have the related data center and infrastructure costs underlying, unlike the Q2 platform does. So I do believe that they are higher-margin project – products that as they become more material to the overall revenue line can help drive that gross margin up above the 60%.

Thank you. And a follow-up question on the – just on the competitive environment. The Q2 has done a great job leading a digital transformation in this market. Do you have some big competitors that have a lot of capital, that maybe have some older technology, but are investing in digital? You see a lot of digital announcements coming out. And do you feel like the – some of the legacy competitors are becoming more of a threat to the high growth that you've generated over the last several years?

Yes. I would say that the competitive environment hasn't changed much. I think that, in general, we feel like we've got a pretty good lead on the large guys from a product perspective, the breadth of the products, our ability to integrate no matter who the back-end processor is. But they're investing in these technologies like we are. And we do think that having mission-driven culture and focus exclusively on the digital transformation provides a focus difference that they have. And with a $160-plus million on the balance sheet, 18% into R&D and the success we've had with our products, I feel pretty good about our competitive position as we move into the next two to three years.

Great. Thank you. I appreciate it.

Thanks, Bob. Appreciate it.

Your next question comes from the line of Eric Lemus from SunTrust Robinson Humphrey. Please go ahead. Your line is open.

Good morning guys and thanks for taking the question. It was really nice to get a commentary around the recent acquisitions stronger than expected. So I want to focus on Gro Solutions, and you said you signed up the biggest deal with Gro in the quarter. Can you give a little more context around that deal, relative size to other deals that Gro has done? Was this deal in the pipeline prior to the acquisition? And I guess what was that bank using before or what were they doing before?

So from a relative size, I don’t have that information on what the economics would be from what the next biggest deal was from a size perspective. These are typically like a Tier 3 bank opportunity. So they’re – from a MRR, or monthly recurring revenue, perspective, they’re sub-$30,000 in MRR. But keep in mind, the value of digital onboarding to us – or the customer and us is that you’re adding a new user on the system. And so just take ARPU and multiple that times every single new customer that onboards and becomes an account holder. So the value of Gro is not just the subscription fee that we get out of them. And I think you’re going to continue to see, as I’ve said earlier, Gro to be a critical part of a lot of the sales that we have going forward, whether it’s for Open, whether it’s for Cloud, whether it’s for the platform. So really happy with that business and we’re going to continue to invest in it and make sure that we distance ourselves from the people that are chasing it.

Got it. Thanks.

Your next question comes from the line of Joseph Vafi from Loop Capital. Please go ahead. Your line is open.

Hey guys, good morning. Good results. So I was wondering, at this point, maybe it’s a little early, how much appetite you’re seeing for your new solutions in the Tier 2 and Tier 3 bank business or is it really just more in the Tier 1s that are looking at these more leading-edge solutions?

Yes. Thanks, Joseph. No, I think the Tier 2 and the Tier 3, as you would talk about the billion-dollar bank, the Q2 Open deal, which was – it was a $5 billion bank, but we actually had a couple of others in the quarter that were Tier 2s and Tier 3s. The Tier 2 and Tier 3 is – as engaged, is a bigger part of the pipelines than the Tier 1s are, and they make decisions faster. So, I don’t think this has just targeted the Tier 1s. I think the Tier 2s and Tier 3s are going to be, as I said on the call, the bread-and-butter not only in the net new side, but a lot of these cross-sells.

Okay. And then just a question on kind of ECV on some of the newer deals. I mean it’s kind of implied obviously if you win an online banking customer, it’s going to ultimately be kind of offered to that bank’s entire customer base. But these solutions are a little different in how they work and what the functionality is. And I’m just trying to get a feel for pricing here and how you think about that versus kind of perhaps a more broad online banking solution sale? Thanks.

So, I think in the CLS instance in particular, because they’re multi-asset class, I think we’re still trying to work with them to make sure that we understand the best pricing model go forward. But you’re going to see similar like you see on the platform side, you’re going to see a base monthly fee per seat basically for the platform in that first asset class that they rollout. And then I think you’ll see add-on module fees if they want to go from, say, doing small business lending to corporate lending and rollout a different type of asset class. And I think that Cloud Lending, I would say, is comparable to a corporate upsell deal for the platform from a size perspective. And then Gro is, as Matt mentioned, closer to – it’s really just a product add-on that is not really a per user, but it brings with it the per-user fees for all of those account holders that they onboard using that solution. So, it should help lift the overall online banking fees as well, but it is similar to a small Tier 3 deal in size.

Great. Thanks very much.

Thanks, Joseph.

Your next question comes from the line of Brett Huff from Stephens. Please go ahead. Your line is open.

Good morning and congratulations on the nice quarter.

Thanks, Brett.

Two questions for me. Number one, last quarter, you talked a little bit about the positive impact to the gross margin and the revenue growth from some of the debit card-driven open products. And I wondered if there was any detail you can provide us there? We think that’s one of the early extensible and exciting opportunity. So any detail there is question number one.

I think a lot of the commentary last quarter was really cautioned you about some of those wins. And that really is dependent upon the adoption of the account holders and then their adoption of debit cards and then the actual use of those debit cards to drive that interchange fee. As they do that and as that grows, yes, it’s very high margin. There’s relatively no cost associated with it. But we’re still very early in that game and those Fintechs are still in the early stages of those rollouts and getting adoption of that. So, we’ve yet to see a material number come from those interchange fees. But I do expect that’s an area of growth go forward as more users adopt and begin using those debit cards.

Yes. That’s helpful. And the second question, talk a little bit more about the sale and the adoption, I guess, the implementation of the Cloud Lending platform. Typically, LOSs are sort of a long and arduous path to get put into a bank, and I understand that sitting on top of sales force really helps. Are you surprised at how quickly these implementations can happen, even relative to your expectations going in? Or did you kind of know things were as quick as they were given that choice to deploy on top of other technology? Or any thoughts around that would be helpful. Thank you.

Yes. Thanks, Brett. I would say that surprise probably is the right word. Like I said earlier, it depends on what the financial institution of the all-price is trying to do. But it really is working on force.com allows you to move a lot faster and deliver things. And it’s also a matter of, are you in lockstep at the beginning of the project of what they’re trying to accomplish, the process that they’re trying to improve. So I wouldn’t say I was surprised by it. I am. It is – it’s not the same thing as the platform, where you’ve got to move all these customers and one day, you flip the switch on and they all have to go, reset their password up. And so it’s a different experience. But I think what we’re going to try to do is continue to drive efficiencies through that process delivering this. Customers want more technology faster, so that they can begin to drive lending – drive more lending through the channel. And so the example I gave earlier, that $20 billion bank to sign a contract in the fourth quarter and be live and having application of funding in 10 minutes is pretty darn impressive, and I think that story will sell a lot more deal for us.

Great. Thank you.

I appreciate, Brett.

Your next question comes from the line of Brian Essex from Morgan Stanley. Please go ahead. Your line is open.

Hi, good morning and thank you for taking the questions. I guess for Matt, I think you alluded to, particularly with respect that there’s some writing to cloud infrastructure involved, there's some involvement with system integrators. And there might have been a little bit, or there may be a little bit of kind of bottleneck with the scale of the team and the rate at which you can go live. Any kind of longer-term, high-level thoughts in terms of the rate of involvement with integrators, consultants and partners and your ability to scale kind of faster into the market versus what you might rely on for your own integration teams? And how we might expect the longer term margins to benefit or if you're limited by that?

I think is on the delivery side, Jennifer can talk about the margin expansion how she sees that. But on the delivery side, and the lending business, you're going to – we're going to – we're partnering with more integrators. You see, we've got a lot of inbound interest from people that want to deliver this. They see the value that cloud brings. But also delivering it, having our own team that has the skill set and knowledge on how to deliver, we think, makes us a better company. And some of the deals are going to be tied to platform deals. So we want to be able to control both of it, where we can deliver it on our own, but we also have a nice network of systems integrators, and we're having a lot of conversations. They had relationships prior to us acquiring them, but I think now when you start to look at the digital banking experience and the transformation that's happening, a lot of the systems integrators now, with our size and scale, are beginning to come to us and look at us probably differently than they did as cloud as a stand-alone company. Jennifer, you want to comment on the margin stuff?

Yes. So I would say that was one of the things when we acquired Cloud Lending, we were already – they were already using systems integrators and so they'd already established stand-alone value for the services. Therefore, their services were being recognized up front as delivered versus the spread over the contract term like the Q2 platform. So I don't think that you're going to see a significant change to margins. I think you already see that impact in their business.

Got it. That's helpful. And maybe just a quick follow-up. I think, Jennifer, you noted that there are a couple of surprises on the expense side. I guess with the potential to have, maybe a deal or two pulled forward in 1Q and then maybe make it up on the back of your user conference. As we head into the second half of the year, is there a greater degree of visibility you think in the level of expenses you might anticipate? Or would we still have maybe some moving parts that would wiggle probability a little bit?

I think – I mean, there's always moving parts. But I think we've got much greater visibility. I think Q1, we had some visibility issues because we were in the middle of trying to finalize the annual plan, as well as integrate two new companies. But the back office systems of those companies are now integrated. We've got great consolidated view. And other than just unexpected exercises or unexpected increase in stock price that drives the value higher on RSU vest and employer-match taxes, like I've already mentioned, I think we have control over those expenses.

Got it. That's helpful. Thank you very much.

Thanks. I appreciate it.

Your next question comes from the line of David Hynes from Canaccord. Please go ahead. Your line is open.

Hey, thanks very much. Congrats on the bookings activity. Matt, one for you to start. If we continue to see a rise in the digital-only channel, is there any difference in your ability to monetize those users or the margin profile of those users versus those that come from the traditional regional bank channel?

No, I don't think there's any difference in those. It would – they'd be the same.

Okay. Got it. And then Jennifer, on the backlog, I think it's 19% year-over-year growth. How does the backlog duration change with the new products coming into the mix? And I guess what would that growth look like if we thought about it on an ARR basis?

So the timing of the rollout is about 48%, if I remember the exact numbers correctly, in the next 24 months. I think historically, before we added CLS and Gro, that was closer to 50% or maybe right over 50%. It's come down a little bit because the average contract term for the Cloud Lending and Gro Solutions that go in range from 12 to 36 months versus the 66 months for the product – or for the platform. But it's still been relatively consistent at – between, I'll call it, a range of 45% to 53% in the next 24 months with another roughly 40% in the next 24 months after that and then the remainder, out past 48 months. So I don't think the timing has shifted significantly at this point, but to the extent, CLS or Gro begin to outperform the platform product in bookings, you could see it come down because of the term of their contracts.

Yes, okay. That’s what I think. All right, perfect. Thanks, guys.

And our final question is from Mayank Tandon from Needham & Company. Please go ahead, your line is open.

Thank you, good morning. Thanks for squeezing me in. Matt, a quick question on the BaaS opportunity. Thanks for the update on the deal momentum. But could you just talk about what distinguishes you from the multiplayer players out there who are also offering the BaaS opportunity for their Fintech clients? And at the same time, I would just be curious, if you're not having a bank license charter that you had a disadvantage versus some of the provider that actually do have a bank license out in the market?

Yes. Mayank, thanks for your patience on the call. So in general, the reason we're winning out there is the designers and developers want to spin up products quickly. And in order to do that, they need a well-documented and understood API, which is what we have. It allows them to iterate quickly on the platform. And most of the legacy technology wasn't built even – think about that, so the competitors that we're competing against typically don't have the ability to move as quickly, the stuff is not on the Cloud, it's very expensive. And from a comparative perspective, not having a bank charter. We have 400 banks with – 400 customers with bank charters, and we believe that our ability to use our liquidity management, which is to be able to park these deposits from Fintechs and banks and keep them below the Durban number of $10 billion leaves more pie for them to split up. If you think about the interchange rates, at a sub-$10 billion bank, we can go to a Fintech and tell them that there is 1.4% of interchange fee as opposed to 0.4%. So the competitors that have charters as they get above $10 billion, there's going to be less money to split up and it's going to be more difficult. Also this ecosystem that we're creating, we believe is highly differentiated and that you can – we can leverage up as much as we want by adding more and more customers to the platform. It also sells more software whether it's Q2 Open, Cloud, so we think it's highly differentiated and nobody is going around and telling the story right now. And I think that's why you're seeing the premier Fintechs signing with us to do this and also, the line is forming for banks to participate in the broker deposits program.

That makes sense. Thank you so much.

Thanks. Appreciate it, Mayank, have a good day.

And this does conclude today’s conference call. Thank you for your participation, and you may now disconnect. Have a great day.