Q2 Holdings, Inc. (QTWO) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Benida, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings Second Quarter 2019 Financial Results. 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.I would now like to turn the call over to Josh Yankovich. Sir, please begin.

Thank you, operator. Good morning, everyone, and thank you for joining us for our second quarter 2019 conference call. With me on the call today is Matt Flake, our CEO; and Jennifer Harris, our CFO.This call contains forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of Q2 Holdings. Actual results may differ materially from those contemplated by these forward looking statements and we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct.Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our periodic reports filed with the SEC including our most annual report on Form 10-K and subsequent filings and the press release distributed yesterday afternoon regarding the financial results we will discuss today. Forward-looking statements that we make on this call are based on assumptions only as of the date discussed. Investors should not assume that these statements will remain operative at a later time and we undertake no obligation to update any such forward-looking statements discussed in this call.Also, unless otherwise stated, all financial measures discussed on this call will be on a non-GAAP basis. A discussion of why we use non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which may be found on the Investor Relations section of our website or in our Form 8-K filed with the SEC yesterday afternoon.Let me now turn the call over to Matt.

Thanks Josh. On today's call, I'll share our results and key business highlights from the second quarter 2019. Then I'll hand the call over to Jennifer for a detailed look at our financials and updated guidance.In the second quarter, we generated revenue of $77.6 million, up 33% year-over-year and 9% sequentially. We had another solid quarter of user growth as well adding more than 500,000 users. This brings us to more than 13.6 million registered users on the Q2 digital banking platform and represents 19% year-over-year growth.Let's start by discussing two highlights from the second quarter. Our recent capital raise as well as our annual client conference CONNECT, which we wrapped up in May. In June, we successfully raised net proceeds of approximately $462 million through a concurrent convertible debt in common stock raise, building our cash balance as of June 30 to approximately $620 million. This raise strengths our balance sheet considerably and provide additional capital to continue growth through investing in innovation, strategic partnerships and potential acquisitions.I'd like to thank those involved for their support on the transactions and our investors for their confidence in our ability to execute on our strategy.Now, I'd like to share a few updates from our CONNECT conference. This year we had a record attendance with 650 clients representing close to 300 financial institutions and more than 30 prospective clients. As a reminder, CONNECT is one of our best opportunities to engage with our clients, seek their feedback on strategic direction and share progress on our product roadmap. Our theme this year was future proof. The future is our shared vision with our clients and the proof is in Q2's execution and delivery.This year we also announced Q2 TrustView the first data governance and protection technology of its kind for banking and lending based on blockchain technology. We spoke with hundreds of clients over the course of the few days and we heard a few consistent themes. First, that our solutions are highly differentiated and our strategies are aligned. Our customers are excited about the future and we must continue to invest in innovation, delivery velocity, system availability, customer support and overall operational excellence. This was our broadest conference from a product portfolio perspective, with representation from our digital banking platform, Cloud Lending, Q2 Open and more.I will also tell you that expansion in the global markets and working with FinTechs has given us a much broader perspective on the competitive landscape that our customers are facing that broaden perspective is key in informing our strategic directions.Coming out of CONNECT my confidence in our vision and our alignment with our clients is as strong as ever. And it's my expectation that the event will drive new business and cross-sell activity as well as an expanded product roadmap for us going forward.Now I'd like to shift to some commentary on our sales execution. At the halfway point we can say that we have outperformed relative to our expectations for the first two quarters. This is largely a result of the performance in digital banking and the increasing cross-pollination of our expanded product offerings suite.On the digital banking side, we had a strong first half balanced across Tiers 1, 2 and 3 and in both bank and credit union markets. Our bank teams did particularly well in the second quarter with three Tier 1 deals ranging in assets from $8 billion to $26 billion along with continued momentum from our Tier 2 and 3 teams as well.An increasingly common characteristic in our digital banking wins with banks and credit unions is the inclusion of our corporate product suite, which we have continue to mature and expand and which helps our clients compete for new business in their market. This trend proved especially true in the second quarter with the majority of our new clients purchasing some aspect of our corporate functionality. We also continue to see strong cross-pollination among our various platforms and customer bases in the quarter.For example, one of the bank clients we signed was introduced to our platform because they were an existing customer of the Q2 Gro Solutions. In scenarios like this, the ability for banks to support much if not all of their front-end digital strategies through a single vendor and tightly integrated technology stack is becoming a major differentiator and bringing us into more and more deals.In this same van, Cloud Lending signed two deals with existing Q2 platform clients in the quarter, highlighting another solid performance in the North American markets. With the Cloud Lending acquisition, we felt our existing presence could help accelerate its sales success in North America and three quarters into the acquisition that hypotheses is playing out as expected. And while the synergy between our platforms is a key component to Cloud Lending's differentiation in the market, it's important to note that it's not the only reason we are winning these lending deals. In both of these bank wins, there was a strong competitive environment that included a broad set of vendors both incumbent solutions and newer platforms that we compete with regularly.In these deals, Cloud Lending's ability to serve all asset lines consumer, small business and commercial was cited as an important factor. We also continue to hear that Cloud Lending's ability to reduce loan administration costs, while improving the borrower experience make it unique. In addition to its success in North America, Cloud Lending performed well internationally, winning multiple net-new and cross-sale deals in the second quarter with both traditional financial institutions and Fintechs.I'm really pleased with the progress the Cloud Lending sales team is making at this early stage post acquisition and we plan to continue investment into that Cloud Lending business to fuel that success. The sale synergy among our platforms extends to Q2 Open as well and we're beginning to see opportunities emerge between Cloud Lending and Q2 Open clients.To demonstrate this, I'd like to share a win from the Q2 Open team in the second quarter that was the first of its kind. In this deal a Cloud Lending client wanted to build and offer full-featured deposit accounts to their customers. Without a bank charter, this Fintech client faced rigorous sourcing and partnership process to launch their own bank accounts. Both by providing access to modern core technology and the necessary bank partnerships all through a single API, the Q2 Open platform was able to dramatically compress the Fintech's go-to-market timeline.And the Fintech ultimately decided to partner with Q2 Open for its new deposit initiative. Combined with the ability to issue loans to their customers via Cloud Lending, the Fintech is now able to offer a wide range of consumer lending and deposit products all facilitated by Q2.Stories like this demonstrate, how we're uniquely positioned to meet a broad range of needs for Fintech companies that the traditional banking technology providers are challenged to capture. I believe this is one of the reasons that Q2 Open team is ahead of its bookings target through the first half of the year.We are also continuing to strategically expand the capabilities of our Q2 Open platform. And I'm excited to announce that in the second quarter we completed an integration with Visa's Debit Processing Service or Visa DPS within our Q2 Open core processing technology.The addition of Visa DPS as a processing partner provides our clients with an increased reliability and scale on the debit card components of their programs. Given Visa's widespread presence in the space, I believe our new partnership with only serve as a tailwind for Q2 Open sales activity as well.With that, I'll wrap up my prepared remarks by reiterating that, I'm pleased with our progress through the first half of the year. Given our sales execution we plan to continue investing in integration, innovation and delivering successful client outcomes. As I look at our pipelines I'm optimistic and believe we are well positioned to carry our momentum into the back half of 2019 and beyond.Thanks. And with that, I'll turn the call over to Jennifer.

Thanks Matt. I'll begin by reviewing our results for the second quarter before finishing with updated guidance for the third quarter and full year 2019. We are pleased to deliver second quarter revenue that exceeded our guidance. Total revenue was $77.6 million, an increase of 33% year-over-year and up 9% sequentially.The sequential revenue increase was driven primarily by an increase in subscription and services revenue related to the Q2 platform business as a result of customer go-live and organic user growth during the quarter. In addition the second quarter revenue benefited from a sequential increase in revenue from the businesses acquired during the fourth quarter of 2018.Revenue from these acquired businesses also contributed a significant portion of the year-over-year growth. Transaction revenue represented 16% of total revenue for the quarter consistent with the previous quarter and up 15% in the prior year period.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 52.8%, up from 52.3% in the previous quarter and down from 53.3% in the prior year. The year-over-year decline is largely attributable to the head count addition and purchase accounting adjustments related to the acquisitions closed in the fourth quarter of 2018.Total operating expenses were $40.9 million, up 2% sequentially and up 42% from the prior year. The year-over-year increase in total operating expenses is driven by the combination of headcount additions to support continued growth in the core business as well as our acquisitions.The sequential increase was concentrated in R&D and sales and marketing where we continue to innovate and improve our existing offerings, while investing to further capitalize on the growing demand across all of our business lines.As I mentioned on the Q1 call, the sequential increase in operating expenses was also due to the timing of our annual client conference, the cost of which was partially offset by a reduction in payroll taxes.As a reminder payroll taxes associated with bonus payments and equity award vestings and exercises were elevated in the first quarter due to a combination of the timing of our annual bonus payments and the increase in the value of equity awards that vested during the period.Adjusted EBITDA was $3.2 million compared to $300,000 in the first quarter and $5.1 million in the prior year. The sequential increase is attributable to an increase in gross profit driven by increased revenue combined with only a modest increase in operating expenses during the quarter.The year-over-year decline is primarily attributable to headcount additions and the investments made in the Cloud Lending and Gro acquisitions discussed previously. We ended the quarter with cash, cash equivalents and investments of $617.7 million up from $164.5 million at the end of the first quarter as a result of our concurrent convertible senior note and common stock offerings in June.These capital raises provided us with net proceeds of approximately $462 million after issuance costs and the associated capped call transactions which are designed to help offset the potential dilution to our common stock upon any conversion of the convertible notes.Cash flow from operations for the second quarter was negative $7.8 million compared to negative $10.9 million in the first quarter. The sequential improvement is attributable to the timing of our annual bonus payout and the associated payroll taxes in the first quarter.During the quarter, we incurred net capital expenditures of $5.3 million resulting in free cash flow of negative $13.1 million as compared to negative $16.4 million in the first quarter.For the second half of the year, I expect free cash flow to continue to show sequential improvement which as we discussed on our first quarter call is largely dependent on the timing of collections of upfront deposit upon customer signings.Turning to backlog. We ended the quarter at $917 million in committed backlog. This represents a sequential increase of approximately $24 million driven by continued success in customer signings for our digital banking platform as well as our digital lending solutions acquired at the end of last year.Now let me turn to our updated guidance. We forecast third quarter revenue in the range of $78.6 million to $79.6 million and full year revenue in the range of $313 million to $315 million representing year-over-year growth of 30% to 31%.As mentioned on the last call, our revenue overachievement allows us to further invest back into the business and capitalize on our continued bookings momentum. Therefore, we are forecasting third quarter adjusted EBITDA of $5 million to $5.5 million and full year adjusted EBITDA of $20 million to $22 million. This reflects the cadence we discussed in the first quarter call and the impact of the purchase accounting adjustments related to the acquisition closed in the fourth quarter of 2018.In closing, we are very pleased with our second quarter results. We continue to execute on operations including the integration of our newly acquired businesses and we successfully access the capital markets.With that, I'll turn the call back to Matt for his closing remarks.

Thanks, Jennifer. In closing, we delivered a solid second quarter. We hosted a record annual client conference, executed successful capital raises and continued to drive a digital transformation of global financial services.As I look at the opportunity in front of us, I'm confident we're in a solid position to finish the year on a strong note with broad-based success in our bank and credit union markets and continued momentum in the growing Fintech ecosystem.Thanks again for joining us today. And with that I'll hand it over to the operator for questions.[Operator Instructions] Your first question comes from the line of Sterling Auty with JPMorgan.

Yes. Thanks. Hi, guys. Wondering with the three Tier 1 wins, if you could remind us not only with these but the other wins that you've had both on bank and credit unions what does the deployment or rollout schedule look like especially here as we think about the back half and moving into 2020?

Sure, Sterling. So the deals that we signed -- the Tier 1 deals that we signed in 2017 remember they were all in the back half of 2017. They're all as I mentioned last quarter now live on the platform however four of them had elected to do rollout in phases. Three of those four are now fully live as of the end of the second quarter and the remaining one is expected to be fully rolled out by the end of the year. Keep in mind end of the year holidays it may roll into early 2020 but it should be coming up.The three Tier 1 deals that we signed in the first nine months of 2018 are now live on the system and the remaining Tier 1 deal is expected to go live -- or the remaining Tier 1 deals are expected to go live one right at the end of 2019 and the other in the first half of 2020. And the four Tier 1 deals that we signed to-date this year are all expected to be live by early next fall. So they're all tracking to that kind of average 12-month time frame that we discussed previously on Tier 1.

All right. Perfect. I appreciate that. And can you also -- you touched on -- upon on both Gro and Q2 Open with some specific examples. But can you give us a sense of not quantifying exactly the contribution, but how they're ramping a relative to your expectations? And at what point do we start to think about them becoming a more meaningful contributor to the top line?

Sure. So a couple of different pieces. From the backlog increase perspective just like last quarter I think we told you that bookings from the two acquisitions contributed about 30% of the increase in backlog and that's consistent this quarter with some contributing about 30% of the increase in backlog.And from a top-line contribution perspective it's still very consistent with what we've said historically. I will say with CLS's strong start to the year we expect to see some of those deals begin to roll to revenue here in the back half. And -- so I do believe that Cloud Lending could contribute close to 5% of total revenue for 2019 and Gro is still in that same 1% to 2% of total revenue range that we've discussed in the past.

Great. Thank you so much.

Thanks, Sterling.

Thanks, Sterling.

Your next question comes from the line of Tom Roderick with Stifel.

Good morning, guys. Thanks for taking my questions. So looking historically I -- and I recognize -- I'm not great at math here. But I think you're probably creeping up on 30 Tier 1s over the years. So that gives you kind of 4, 5 good years of sort of cohort analysis looking at what they thought historically, what they've added on the platform, how the subs have grown. It's a much different platform than it was when you guys started selling the Tier 1s.And I'd love to hear Matt anecdotally especially coming up from the user conference how the Tier 1s and even some of the larger Tier 2s how they're reacting to a much broader platform? How many of those are you seeing come back to buy commercial? How many are actively sniffing around some of the newer product whether it's Gro or Cloud Lending or particularly Q2 Open or Q2 SMART? Just love to hear about the cross-sell, upsell and how that attraction and feedback is going from those biggest customers.

Yes. Thanks, Tom. I think as we talked about when we started signing them that some of these larger Tier 1 financial institutions they may buy by a line of business meaning they'll buy Corporate Banking or business banking and then the retail group will come look at the retail offering that we have.So the single platform message that we've driven in and then executed on the delivery side has been -- and we've been patient as well. So some of these deals -- we signed a customer in 2000 and then we talked about the four Trustmark in 2014. And they bought the retail and small business and then ultimately they rolled into corporate a year later. We're beginning to see more and more examples of that.And as we deepened our product offerings even on the platform side whether it's Corporate Banking, SMART those types of products Centrix, we've been able to cross sell a lot of those into the customer base. And then you add in Gro, which I think was probably one of our top cross-sold products in the quarter for the second quarter I believe that's correct -- Jennifer is shaking her head.

Yes.

So that's one of the top cross-sell product that we have. We're doing a good job. The relationship management team is going out and sharing with these financial institutions what the product offerings are, how we're integrating them into the current product that they're using and how their life will become easier with a single platform with one system to administer, one vendor to manage. And -- so I've been very pleased with the acquisitions, but also the innovation that we've done on the product side to roll that out.And so now as we walk into customers we're talking about digital banking, we're talking about onboarding new accounts, we're talking about using the data that we have to open -- to create new borrowers with the Cloud Lending product. And - so that story is beginning to resonate.I was with one of our larger customers last month and he -- and the Chief Strategy Officer told me that they're all about organic growth how they're going to get organic growth with more products and more households. And one -- in our platform is the key to driving that for him. And -- so we're going to try to drive more loan volume as well as open new accounts and then cross-sell more products to existing customers. So really pleased with the product offering the relationship management team's ability to go in and have house strategic conversations with these accounts. And I wouldn't limit it to just Tier 1s. I would say in the Tier 2, Tier 3 space we're spreading those products around as well.

Excellent. And, Matt, just on that topic of your customers trying to open more accounts, drive new loan volume, they're going for more organic growth. Really intrigued and positive to hear that Q2 Open is going better than expected. And that's great. You've cut a lot of sort of mouse traps out there, in terms of landing some of these big wins.And I think the message is always, okay, we've got some great traps out there, let's wait and see when the mice start showing up. What's happening from a transactional volume framework on those wins that you might have started landing last year? And how do you think about that sort of translating into revenue contribution on the Q2 Open side?

Yes. I'll talk about what I can on the growth. I think, you've seen about -- from an account on CorePro our deposit processing platform, I think you've seen more than 30% growth on the account side of that business. A lot of these Fintechs are adding a lot of accounts to the system. And then, they have different strategies and plans, whether it's rolling out debit cards or trying to drive bill payment or whatever it might be. So we're seeing a lot of good activity in those groups.One of the challenges with the Q2 Open business, as far as sharing it is, a lot of these Fintechs have private strategic initiatives that are happening and I just can't share those. So we try to share as much as we can, but at this point a lot of those wins that we talked about, they're growing nicely. And we're continuing to see great activity as I said on the -- in the scripted version of this. We had a -- we exceeded our bookings target for the first half of the year and the pipeline for Q2 Open looks great for the back half of this year and then into 2020.

Outstanding. Great stuff.

Yeah. Thanks, Tom.

Thank you, guys. Great job.

Your next question comes from the line of Matt Hedberg with RBC Capital Markets.

Hey, guys. Thanks for taking my questions. Well done. Matt, in your prepared remarks you talked a lot about your success of your CorePro product. I'm wondering, can you kind of give us a sense -- I mean, this is -- you've had quite a bit of success for the past, well, several quarters, if not years. How penetrated in your base is your corporate product? Just trying to gauge sort of the runway left in your base?

I don't know off the top of my head. I think we're probably about 40% -- 40%, 50% range of our customers. But keep in mind, there's different modules attached to Corporate Banking. And as we continue to build the product out and deepen the product set, this is going to drive more -- that'll drive more cross-sell opportunities, but also more adoption opportunities.So you're seeing many of our customers, they still have their large legacy corporate banking product that doesn't work on mobile phones or tablets or it's clunky -- has a clunky user experience. And what they're doing is, as we build our feature function, they're moving people from those legacy platforms to our platforms. So we're driving more usage as well. So there's still a lot of headroom on the Corporate Banking side within the base and also from a development perspective.

That's great. And then, with all the innovations you guys are rolling out, sort of, on top of the core, when you're targeting sort of net new customers, how does that discussion go these days when customers think about where are they potentially funding things?I imagine, as you sort of are -- have the ability to run on top of the all the core processors, is that one of the drivers here of, saying, hey, like, let's take cost out of the core and let's invest in sort of functionality you provided at the top there? Is that sort of one of the value props that customers are talking about these days?

Yes. I mean, I think that -- if you think about the energy that people are putting into the digital side of things, you can't -- there's just not enough capacity to go put a bunch of energy into deposit processing. And if you just think about it logically, Bank of America, Wells, Chase and Citi, when they sit in a room and they're talking about strategy moving forward, the core processor is not driving that conversation. The digital banking team is what's driving where we're going. And I think that's what's beginning to happen in our meetings.The core processors have done an amazing job of driving the importance of that technology and it was truly innovative when it happened, but there's not a lot of innovation happening on it now. And so what we're doing is driving a lot of dialogue around how to integrate with those products, how to get the data out of there.But there's also a lot of other areas where there is data that's coming that we're starting to contribute to our platform as well. So the digital banking conversation or digital lending is top of mind for folks. And core processing, I would say, that they are trying to get some of the cost out of that from -- there's not a lot of innovation happening there.

Sure. Makes a lot of sense. Well done, guys.

Thanks, Matt.

Your next question comes from the line of Bob Napoli with William Blair.

Thank you. I guess, on the Tier 1s, are you still lending with one product and expanding? And how much of it is replacing a product that is there versus a new product being offered by the Tier 1s?

Well, on the platform side of the Tier 1s, the digital banking piece, for this quarter we replaced legacy digital banking systems in all three of those examples. And some of those had Corporate Banking, some of those are corporate -- had Corporate Banking attached to them as well. So, on the platform side, we're always replacing some type of legacy system.And then, you're also seeing, as we talked about in the first quarter, we're beginning to see more and more interest from our customers around starting digital banks or direct banks, which we had some success there -- we've had success there and we're having more and more of those conversations.On the Cloud Lending side of the business, we're replacing spreadsheets, legacy systems out there more probably than -- it's additive to what their lending process is, as opposed to replacing kind of a system that does what the Cloud Lending does.

Great. Thank you. And a bigger-picture question, you guys obviously raised a lot of money and the -- I was just curious where you see the biggest opportunities to add to your platform. Is it RegTech, InsurTech? What are the areas of focus that you want to look to add to the platform in the ecosystem of Q2 if you would?

Yes. So keep in mind, when we talked about the fundraiser we talked about investing in internal innovation, which we're going to continue to do and we've got, I think, a solid track record around doing that. And that would be on all the platforms, including integrating them together so that they talk to each other and they share data.From a acquisition perspective, when you think about Jonathan on the Corporate Dev team there and there's clearly -- we're diving into vertical integration. So thinking about digital banking, digital onboarding, digital lending and then the feature functions that go through that. So that would be GRC, like you referred to, security or data, or somewhere in the lending value chain around new assets or documents or pricing optimization.And then, there's also potential for horizontal expansion in the business. So that could be things like digital wealth, digital insurance or capital markets. But we are out there and looking at things and trying to find what's a good fit. And also, we're trying to execute on what we've done in the past. So we're active and we're looking at things, but we're going to be prudent and diligent as we go through it.

Thank you, Matt. Thanks Jennifer.

Thanks Bob.

Thanks Bob.

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

Hi, good morning and congrats from me as well. Maybe Matt, the first question just relates to -- Q2 Open you've been at it for a couple of years with that technology and now Cloud Lending in more recent development, it sounds like though you're finding your footing nicely. Could you maybe compare and contrast those two for us and investors as it relates to contributor to revenue growth and potentially upside over the next couple of years? How would you kind of stack rank them and compare them?

That's like trying to say which kid you like the most. Terry, I'm really happy with the bank -- the Q2 Open business. And the effort that that team has put together in having to reach out to different types of customers and prospects, they really have done an amazing job of getting in with these Fintechs. And not just the Fintechs, but may be private equity or people that are involved in that space and the referral base that we're getting and the execution that they're delivering with some of these -- some of the biggest named Fintechs in the business has been very impressive. And so the upside there is tremendous and I'm really excited about it.On the lending side, the team that built the Cloud Lending product, we bought the right technology, we bought the right team and we bought the right culture that they have. And it's a huge opportunity. It's global in nature. We're seeing nice wins in all of our geographies. And there is a little more work on the integrating the product to the platform side than the -- than obviously the Q2 Open stuff. But both of those represent tremendous opportunities and I'll pit them against each other to see which one can do the best, but they are on very similar trajectories from a growth perspective.

I guess to be clear though, you do love all your children. So that's good Matt. Thank you on that. Yes, I guess then Jennifer for you in terms of -- I think it was like a $3.7 million increase at the midpoint for your full year guidance. I guess, like what goes into the increase in the guidance? Is it more on the digital banking side and just the timing of some of the rollouts? Or was it CLS? Or just -- any one item that stood out on the increase in the full year guidance? Thank you.

The increase in the revenue expectations is really just result of the good execution we've seen across all lines of the business. It's a combination of bookings execution across all tiers and all business lines. Additionally, the delivery teams continue to execute and get customers live on the various platforms. And the other factor that came into play is just the timing of those go-lives within the quarter, right? We had anticipated in our original guide for the quarter that about 50% of the customer go-lives that happened in the quarter, would happen in June, that's historically kind of how it's played out. But the team did a really good job and actually pulled forward such 75% of the deals that went live this quarter happened at the end of April and by the middle of May. And so yes, more revenue in the quarter from those deals than we would have anticipated.

Thanks Terry.

Thanks.

Your next question comes from the line of Brad Berning with Craig-Hallum.

Hey, good morning, guys, again. Congrats on the wins as well. I wanted to follow up on the innovation race and talk about the innovation gap that you have versus competitors across the business lines and also now as point together as more of a platform. How are you seeing that innovation gap raise differentiating yourself versus competitors? And how is that impacting the win-loss ratio? And where do you see attributes in the platform or product suite areas that are gaps for you versus the competitors? And where are priorities to close those gaps to further help to win kind of loss ratios going forward?

Okay. That's a big question. Let me try to frame. I think what -- how we're viewing our FinTech message or what our messaging is to the market which is essentially we are opening our platform up so that third parties can integrate to our system, so that loads of banks and credit unions or FinTech, they all have a different plan on what they're trying to do and the openness of the technology is critical. And we're seeing probably 15 to 20 developers from our customers coming to our office once a month to get trained up on our SDK or software development kit or APIs, so that they can begin to do innovation.As they do that innovation, that's unique to them that will drive more data into the -- so data is a huge part of our strategy, how do we get this data so that the customers can understand who their customers are, so they can provide better service, deepen their relationships, cross sell products and generate revenue ultimately.And then lastly as we innovate, we are trying to move from this idea of your doing a transfer or your opening an account or your paying a bill to what is the meaning of that experience, meaning that people are trying to manage their cash flow so that they can run their life and not get in debt or people are trying to -- as I heard this quarter from somebody, people don't want to loan, they want a house to raise their family and they want a loan to go build a small business. And that's where we are trying to drive those experiences that the people, that our customers in these financial entities accomplish these things and they feel that their bank credit union or FinTech help them to do that. And that will drive loyalty.So opening the system up, using the data to -- gathering the data from opening the system up and then driving experiences that are lasting and meaningful that the customers associate with the brand whether it's a bank or credit union or FinTech is where we're going. There is -- in a growth curve like we're in right now, we're -- people are signing up and using digital as we said last year two billion log-ins. You just -- there's so much to be done that I think keeping our focus on what helps our customers be competitive, what helps them have some operating efficiency. And also we look at around the corners to see what Amazon may do, what is Bank of America doing, what is Facebook doing and we're thinking about technology that way. So there's a lot of investment opportunities for us, but we're also trying to make sure that we're thoughtful and we're -- we're not afraid to fail. But if we do, we get out fast and figure out a new way to do it. So hope that answers your question Brad.

That's a good insight. And then the one follow up is when you talk to Tier 1s, Tier 2s that have been more in-house historically speaking. What is the pace of those willing to consider an outside vendor versus internal? And how do you see about kind of the penetration of Tier 1 opportunities out there in the market that still have outsourced opportunities?

Yes. We continue to hear internal -- from the larger entities that running your own development shop, having your own technology stack, they can't -- they are trying to get it out of their facilities as quickly as possible. They still want some development resources. But the idea of running an entire development team to build a product suite to nuts is -- the people that are doing that are abandoning that as well. They're wanting developers to go right to products like our Q2 Open product or SDK on the platform side or using our learning product to drive whatever is unique to their business.So, we're continuing to be more and more larger and larger customers get out of the development and technology management business and move to what their best average is deposit growth and loan growth.

Understood. Hey, thank you very much.

Thanks Brad.

Your next question comes from the line of Brett Huff with Stephens.

Hey guys. This is Joe on for Brett. Congrats on the quarter.

Thanks.

So, my first question just given the recent volatility in interest rates, just curious if that has any impact on what the bank's net interest margin if you've seen any of that affect demand and if you will provide any color on that? Thank you.

Yes. Thanks Joe. No, I mean we've have operating in this low-interest rate environment for a while. So, the change last week is -- what was some kind of a part of the question. And what I would say is that that doesn't take away from their need to go drive a digital strategy. It actually contributes to it.So, as net interest margins go down they -- net interest income goes down, they can continue to -- they need to continue to invest in ways to drive them more efficient way to get the deposit or generate a loan and so we're right in the middle of that.So, this helps them. I know there is so much legacy technology out there that they have to replace. Their cost more to manage and administer and then provide a meaningful user experience that -- this is kind of standard operating environment for the last 10 years for these customers and we're just trying to help them whatever we can to help drive revenue and decrease costs.

Great. And then my follow-up would be just if you could you kind of just differentiate the demand trends between credit unions base and bank. How do they differentiate? I imagine there's a lot of similarities there, but just any color would be helpful. Thank you.

Yes. I mean I think in general credit unions are little more retail focused than community banks are. And -- so I think you're seeing -- the Corporate Banking is adopted in almost all the majority of our bank deals. And on the credit unit side it's a little more of a retail slant.Although, I will tell you that we are doing very well on the credit union side with our Corporate Banking offering both on the cross-sell and net new side. And you're beginning to see credit union build a presence in the business banking side of the world.So, they're beginning to blend a little bit. And we see some banks as we talked about we had a Tier 1 $30 billion bank in the first quarter, they started launching a direct bank. So, you're beginning to see a blend on these things. And they're all trying to get deposits to fund loans. And if they have a bunch of loans, they need to deposit to help it. So, that's the core of what they're doing and we're just trying to sit in middle of it and help them as much as possible.

Thank you, again, congrats.

Thanks Joe.

Your next question comes from the line of Peter Heckmann with D.A. Davidson & Co.

Hi, this is Alexis on for Pete. So, just a couple of modeling questions. Could you provide the GAAP and non-GAAP revenue for Cloud Lending and Gro separately?

We don't disclose that.

Okay. And then could you clarify the Tier 1 banks great quarter on signings by the way. Could you clarify if those were for the retail commercial or for the Gro Solutions?

They were platform customers for digital banking. They were a mix of retail and Corporate Banking.

Okay, great. Thanks. And then one more on the general competitive space. Could you provide any thoughts on NCR's Digital Inside subsidiary buying D3? Do you think that that may result in a stronger competitor in the market of banks with about $10 billion in assets?

I don't know. We'll have to see what happens with that. We didn't run into D3. I think they -- I don't know. But I think they had probably less than 10 customers. So, we didn't run into them a lot. It'll be interesting to see what NCR does with that.I mean we have one system and it keeps us busy and now they have two. So, I -- they've got -- as they put that together we'll tell you what happens in the market. But obviously we haven't seen much out of it yet, but we'll be watching closely.

Okay. Thank you.

Thanks Alexis.

Your next question comes from the line of Brian Peterson with Raymond James.

Hi thanks for taking the question and I'll echo my congratulations on the strong bookings. So, Matt, just very strong first half. Anything that you can share in terms of kind of momentum through the pipeline and how you feel about your confidence as kind of the second half pipeline as we think about the rest of 2019?

Yes. I mean I think that -- obviously, we are coming off of -- all of 2018 and 2019 have had a steady flow of whether it's Tier 1s, Tier 2s, Tier 3s. The team is executing on a very high level. Our messaging around a single platform for retail small business, Corporate Banking, adding, lending, onboarding to it is resonating very well. It's all backed up by the execution though of our teams delivering the software, keeping customers happy.As I said at the client conference, the customers are excited about the innovation but they don't want to us to take our eyes off of the infrastructure and support and those types of things which is -- in a growing company it could be tough.So, as long as we continue to deliver innovation, but also keep our customers happy at the same, I think you're going to continue to see the execution into the back half of this year. When I look at the pipeline it's -- whether it's Q2 Open, Cloud Lending, or Digital Banking, it's healthy. We have a -- deals that are down the path. I think we borrowed a little bit from the Tier 1 space in Q2 from Q3. The team did a great job of pulling one of those deals in that I probably thought was going to land in Q3. So, we've got our work cut out for us in Q3. But in the back half of the year, I think you'll see more Tier 1s coming in. And I think you'll continue to see us do well competitively against the market that's out there.

Thanks. Matt. And it sounded like the corporate suite attach rates have really ramped up particularly with new customers. I'm just curious -- and I don't know if there's a way to bifurcate this, but I wanted to know if your customers are seeing the need for that kind of in the early stages.So, they come in the pipeline looking for multiple products or is it may be later stage where they come in for one and then see the value of the whole portfolio? And potentially are purchasing more products particularly in the corporate suite.

Well, on the banking side of the business, our sales team leads with corporate, single platform for all those things. And I think a lot of people when we dive into the future functionality the platform, I think a lot of them are at -- a lot of the prospects are surprised by the depth of our functionality. And also we show them the roadmap but we also build on the -- our track record of delivering.So, on the banking side we are leading with corporate and retail is coming along. On the credit union side, I think we've got little more education there. So, as they see it they start to think well this is an opportunity for us. So, it may be that they buy the retail platform first and follow on quickly with a Corporate Banking opportunity.

Thanks Matt.

Thanks Brian. Appreciate it.

Your next question comes from the line of Mayank Tandon with Needham & Company.

Hey, good morning. This is Kyle Peterson on for Mayank. Thanks for taking the questions. Just wanted to start on kind of any changes in kind of bank client, spending, or priorities, given the move down on interest rates are you seeing any more interest in maybe the CLS solutions now that maybe deposit pricing pressure might have lessened? Or is it just pretty kind of stable steady as she goes?

Yeah, I mean, it's stable and steady as it goes from our – from what our contract has been from the last couple of years which is they want more digital more automation less need for human intervention. They want to have a single experience for customers whether it's borrowing or opening an account or managing your cash. They want to have a consistent expense across all the devices and something that attaches directly to their brand. So it's – the demand environment is as good as it's ever been from that perspective.

Great. Thanks. And then, I guess, if I could just follow up on competition particularly in Q2 Open platform. I know how banking service has been pretty hot lately as no other competitors, especially that has advertised kind of a full-fledged offering having the bank charter with it. Just wanted to see – get your thoughts on kind of where do you see the most success winning some of these Q2 Open deals and kind of what you think kind of sets your platform apart from maybe some of these other vast offers – offerings and competitors?

Yeah. I think as we've talked about the breadth of our Q2 Open offering is a cloud-based core processing system with open APIs that people can write too. And with that, and the technologists and the FinTechs or these banks they can get into it's sandbox within two weeks and begin writing whatever front-end user interface they want. So after they write that user interface people then want to begin taking deposits. And then we have a bank of record network, where these FinTechs can partner with our existing customers to part deposits with them and participate in the interchange and the float, which is a revenue generator for both our customers as well as – for the bank customers as well as for the FinTechs.And then, as we talked about on the call payment flexibility around you want to choose Visa or another card network we give customers the ability to kind of go soup to nuts on these offerings. And then we also have experienced – we also have things we talked about like Cloud Lending, we have Biller Direct, CardSwap which allows people to do bill pay also to manage debit cards that are issued or stolen and replace them. So the breadth of our offering and the flexibility in our offering is highly differentiated.And I think that's why you see our – you're seeing our success with some of the top 10 techs in the world right now, because it gives them optionality but it also gives them one vendor to work with. A lot of these other ones it's the bank that's offering a card but they don't have a deposit account. There's not as much optionality around because there's nothing you can do with lending, they don't have anything around bill pay. So it's just – the breath of our product offering our track record of delivering has really differentiated us in the market. And I think you're going to continue to see us do that as we invest in this business.

All right. That's good color. Thank you. Next quarter.

Thank you. Your final question comes from the line of Arvind Ramnani with KeyBanc.

Hi. Thanks for squeezing me in. Most of my questions have been answered, but just couple of quick ones. With there still mega mergers in market with Fiserv kind of Worldpay First Data has that really impacted had any impact on the overall demand or competitive environment and given that they are focused on integration does that – has that opened up additional opportunities for you guys?

Arvind, I wish I could say this. Bunch of people falling out, but the environment is still good. But I can't attribute the good environment to anything that Fiserv or RFI's is doing. I mean those guys are professional acquirers they know what they're doing and we're going to stick to our game plan about driving digital experiences. They get more and more into the payments business. And they're very good at that. But what we do is vastly different than what they do. So the competitive environment we continue to win out there. And we're focusing on what we're doing, but keeping an eye on those guys as well.

Great. And then Cloud Lending, it's been a year since acquisition. You've taken kind of the combined offering to clients had a chance to integrate it. How – overall, kind of just looking back at the year, how do you really feel about the acquisition? And kind of longer-term over the next two three years do you feel confident that it will change your revenue growth trajectory?

So, just keep in mind we announced it in August of 2018, but we didn't close it, till October of 2018. Not that big of a deal. But it's not been a year yet. There's a lot of work there's a lot of integration there's a lot of things there's a lot of – and a lot of time that's gone into that business. As I said earlier, we made – we bought the right people the right culture the right technology. We're doing it the right way by trying to make sure that we don't outkick our coverage on some of the sales process that's happening, and having discipline around our asset classes that we're going after. I think that it will be a contributor to the growth of this business the margin improvement and profitability in the long run.So very happy with that transaction, and I think that it's going to require more investment and we've obviously made that clear in the last couple of quarters. But the opportunity is tremendous and we're – our investments are long term in nature and they revolve around products people and infrastructure and it's no different with Cloud Lending. We're going to have to continue to do that. But I'm extremely positive on the power of a single platform for digital on-boarding digital banking and digital lending. And I think our team is up to the task to create the most compelling platform out there for digital transformation.

Very helpful. Thank you very much. Good luck for the rest of the year.

Thanks, Arvind.

And this concludes today's Q2 Holdings Second Quarter 2019 Financial Results. Thank you for your participation. You may now disconnect.