Good afternoon. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings First Quarter 2024 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Josh Yankovich, Investor Relations. Sir, please begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our first quarter 2020 conference call. With me on the call today are Matt Flake, our CEO; David Mehok, our CFO; Jonathan Price, our Executive Vice President of Strategy and Emerging Businesses; and Kirk Coleman, our President, who will join us for the Q&A portion of the call. This call contains forward-looking statements that are subject to significant risks and uncertainties, including, among other things, with respect to our expectations for the future operating and financial performance of Q2 Holdings and for the financial services industry. 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 copies of which may be found on the Investor Relations section of our website, including our quarterly report on Form 10-Q for the first quarter of 2024 and subsequent filings and the press release distributed this 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 and in our Form 8-K filed today with the SEC. We have also published additional materials related to today's results on our Investor Relations website. Let me now turn the call over to Matt.

Thanks, Josh. I'll start today's call by sharing our first quarter results and highlights from across the business. I'll then hand it over to Jonathan to discuss our strategy and emerging businesses. David will then discuss our financial results and guidance in more detail. Our financial results in the quarter outperformed our expectations, getting us off to a strong start towards the long-term financial targets we shared in February. In the first quarter, we generated a total non-GAAP revenue of $165.5 million above the high end of our guidance. We also continue to deliver on our commitment to improve profitability in the quarter with adjusted EBITDA of $25.2 million, also above the high end of our guide. And for the first time, we generated positive free cash flow for the first quarter of a year, a total of $6 million, demonstrating continued improvement in our financial profile. In addition to our solid financial results, we continue to see strong demand in the first quarter with notable activity across net new expansion and renewals. We signed a broad mix of deals across asset tiers, highlighted by a greater number of total Tier 2 and 3 deals compared to any quarter last year as well as 4 Tier 1 digital banking deals in the quarter. Two net new and two that were meaningful expansions. Our single platform value proposition was a common theme across all four of these Tier 1 digital banking wins. On the net new side, we won an opportunity with a $20 billion bank that will consolidate from multiple disparate incumbent digital banking solutions and use Q2 for retail, small business and commercial. The second Tier 1 win was a retail digital banking deal with a $10 billion bank, demonstrating that our platform remains highly differentiated, even in significant…

Thanks, Matt. I'll start with Q2 Innovation Studio. As Matt mentioned, the fintech partner ecosystem we've built through Innovation Studio has become a critical part of our story, whether in winning net new deals, where it was a key driver in every net new win in the quarter or in terms of expansion where it's helping our customers unlock new business outcomes and in turn, strengthening our existing partnerships in ways that go far deeper than a typical incremental product expansion. I'll share a quick customer story to demonstrate this dynamic. We have a Tier 1 bank that's been a Q2 customer for over 10 years. And like many financial institutions today, they are laser-focused on acquiring a new generation of customers. The bank believes embedding best-in-class fintech partners will be a key part of that strategy, and they are using Q2 Innovation Studio to rapidly deploy partner solutions integrated into their Q2 digital banking platform that will help them create a better user experience, reduce friction and meet the next generation of customers where they are. One partner the bank has deployed -- provides a digital customer support platform, providing AI-powered self-service and virtual chat capabilities, along with the ability to offer real-time dedicated banking guidance much like a traditional banker wood in the branch, right inside the digital banking experience. The rollout of this partner has had a significant impact for the bank. Customer adoption has been incredible with minimal marketing on the bank's part. More than 20,000 of their customers are using the new solution. Those customers are now resolving a majority of their typical customer support issues using the virtual chat, which has had a direct correlation with the reduction in call center volumes. These gains have enabled the bank to rethink how they allocate their…

Thanks, Jonathan. We started 2024 with a strong quarter. bookings drove meaningful subscription ARR and backlog growth. We delivered revenue and adjusted EBITDA results above the high end of our guidance and for the first time in company history, we generated positive free cash flow in the first quarter of the year despite normal seasonal cash flow headwinds. I will now discuss our financial results in more detail and conclude with our updated guidance for our second quarter and full year of 2024. Revenue for the first quarter was $165.5 million, an increase of 8% year-over-year and up 2% sequentially. Our total revenue growth was primarily from subscription-based revenues, which grew 13% year-over-year and 4% sequentially. The year-over-year and sequential growth was driven by new customer go-lives, strong expansion sales with existing customers as well as improved renewal economics. Typically, these expansion sales have a quicker time to revenue and are accretive to gross margin. The stronger renewal performance we are seeing is a continuation of the renewal strength we saw in the second half of last year. As we more effectively capture the value we deliver to our customers and extend contract duration. As expected, our services and other revenue declined both sequentially and year-over-year, driven by continued pressure on the size and scope of our professional service engagements, which are more discretionary in nature. We do expect the magnitude of the year-over-year decline in services to improve throughout the year. But as mentioned previously, we continue to expect to see contraction going forward in this lower margin revenue stream due to the macroeconomic factors and financial pressures our customers are facing. Transactional revenue increased by 5% year-over-year and 7% sequentially, largely driven by Helix-based revenues associated with higher seasonal usage. Total annualized recurring revenue or total ARR grew…

Thanks, David. I'll conclude by reiterating a few key takeaways from the quarter. First, we continued our sales momentum with a broad mix of net new and expansion wins. The two Tier 1 digital banking expansion wins from the quarter demonstrate the unique opportunity we have to deepen our existing relationships because of our single platform and large, diverse customer base. And given the strength of the demand environment, the state of our pipeline and our recent win rates, we're optimistic about the remainder of the year. Our emerging businesses continue to execute well, and we saw key sales and renewal contributions from our Centrix risk management and relationship pricing solutions as well. And finally, we delivered financial results that outperformed our expectations while also achieving positive free cash flow for the first time in the first quarter. These results represent a promising start towards achieving the 3-year financial targets we shared in February and underscore my confidence in the opportunities ahead of us. Thank you, and I'll hand it over to the operator for questions.

[Operator Instructions] And your first question comes from the line of Alex Sklar.

Great. Matt, just to start with you, I appreciate all the expansion opportunity comments and the excitement around that. I know a lot of your customers are proud prospects are probably on multiyear contracts for some of the solutions you're trying to expand with them on. Has anything changed in terms of their willingness to look at Q2 solutions earlier in their contract cycles and not worry about timing just given renewed emphasis around deposits and efficiencies that they can gain around a single platform?

Yes. Thanks, Alex. Well, the contractors for the SKU that they're running. And so what happens particularly in the larger deals is they buy their retail solution, it takes a year to deliver, we deliver. They have a good experience and then they kind of get the team together on the commercial side or on precision lender or one of the larger SKUs and say, let's go look at this to take advantage of all the stuff I talked about there about the single platform. So but the advantage to us is you have a master services agreement with them. You had a good experience on the conversion. They begin to know how you work and they want to do the expansion with us. And so that's really why we highlighted that in the call, which is, as we talked about, we have 220 customers that are greater than $5 billion in assets and 40% of them are only running one of our large SKUs. So they can go buy any of these products at any time. It's more about capacity that they have to project manage and the organization ready to do it. So it's a tremendous opportunity, and I appreciate you ask the question because we wanted to make sure that we articulated it to the shareholders.

Okay. Great. And David, just maybe a two-part question for you. Last quarter, you kind of called out the largest delta between booked and implemented ARR that you've had in some time. Just with another quarter past, can you update us on the visibility of getting that ARR live? And then second part here, just given the comments of some of these expansion bookings and faster time to revenue, is there any change that we should think about in terms of percentage of your bookings on average that can impact revenue kind of in year or faster?

Yes. Sure, Alex. I'll take the first one and then move on to the second. On the ARR, now live. So last quarter, if you remember, one of the things that we conveyed and we sort of gave this in the context of the overall ARR commentary, was that 18% of that wasn't live. That number is now down to 15%. But two things to keep in mind. The first one is Q4 was a record bookings quarter, and we talked a lot about the momentum that continues into Q1. But Q4 is seasonally large and that's part of the reason why you saw so much of that now live. The second part of that is that 15% number is still the second highest we've seen in years. So we're still at a really high percentage of our overall ARR base that is not in the ground yet. So that's great news for us in terms of visibility. It's great news for us in terms of what we've already told you in terms of those long-term projections. The second question, I think, was around what percentage of our bookings do we see current year. The easiest way to think about that is with net new sort of bifurcate net new and cross our expansion. On the net new side, anything that we do going forward for the rest of the year, you're going to see very little revenue. As you know, the implementation cycle, depending on the size of the deal, it can be anywhere from 9 to 15 months. Conversely, on the cross or expansion side of things, we're seeing a lot of strength and the time to revenue for that is quicker. But you still do see, let's say, 4 to 9 months depending upon the types of expansion solution that we have. So we'll see some of that revenue but the majority of it is going to come in the second half of the year. The one that we do see immediate time to revenue is some of the expansion opportunity we have with specific licenses for our solutions. So there is an immediate recognition for some of that. And we did see strength, quite frankly, in Q1, and that's part of the revenue upside that you saw in what we delivered.

Your next question comes from Terry Tillman.

Congrats from me as well. I'll keep it to two questions. The first question is, I like all the color in terms of the $3 billion ARR opportunity in the $90 million and the $130 million I don't know if this is for you, Matt, or whoever else, but I wanted to probe on the 90 Tier 1s, I think you're only using one of your two digital banking sides of the house and then the 130 Tier 1s that actually don't use any digital banking. As you look out at your pipeline and how you've got your go-to-market kind of targeting, what of those two sets seems the most kind of actionable near term, again, the $90 million or the $130 million? Kind of curious, any kind of commentary you could share on that. And then I had a follow-up for Jonathan.

Yes, Terry. I would say the 90% are probably because they're using either retail or commercial banking with us. And so they're using the platform. And what we're really seeing right now, as I talked about in the script is that these banks are trying to find efficiencies, and they're trying to find a better digital experience. And when you're running our retail product and you want to add commercial, you don't have to implement a whole new system, you have to learn a new back office. You don't have to do new hooks into the core check imaging statement imaging, ACH and wire, the system is there. It's about on-demand and turning on those features and then converting the customers over. So there's a tremendous amount of efficiency that the bank or credit union gets from turning on those. And so those are the ones where we're seeing a tremendous amount of demand. If you look at the two of the commercial -- of the Tier 1s that we signed that were cross-sells one added retail and one added commercial. So all of those are what I would say the opportunities are, but that doesn't mean that we're not calling on the 130 to cross-sell and retail sell business, corporate, precision lender, fraud products. There's just a lot of opportunity there. And we have a customer base, I don't know if you saw it or not, but the top 100 Forbes banks were announced a couple, a week or so ago, 58 of those are Q2 customers. So we have a really solid customer base. I think we have the premier customer base in North America for financial institutions and 58 of the top 100 Forbes customers use our technology. So as a tremendous opportunity there. We have a really strong customer base to go cross sell into. So we're obviously excited about the opportunities.

That's great, Matt. And I guess maybe, Jonathan, on the Innovation studio. The anecdote about the one customer kind of getting over 50% of the contracted platform kind of almost making it up through the fees and just what they can do for their business. I'm curious, though, you have 160-plus partners it seems like -- and you're continuing to expand it. How are you getting monetization? Because it seems like you're providing value for both your end customer, but then also the partners. So anything you can quantify on innovation studio monetization or how to think about it over the next couple of years?

Yes. Thanks, Terry. Yes, the way I think about it is whether it's in the Accelerator program or the marketplace, strike a revenue share with each of the partners for any deal they do in the marketplace, we share in that revenue with the financial institution. And so if you think about from the partner's lens, they're accessing our channel of 450-plus financial institutions that are live on digital banking today, 23 million end users on that platform that log in 5 billion times a year. So they're getting access to a pretty compelling channel with one integration to go deliver their solution. And for them, the alternative of going onto one-to-one across the FI landscape in the U.S. is a pretty daunting task. And so they really do value the channel and we have partners where we represent a meaningful component of their revenue as they scale across us and other channel partners. So it's certainly a valuable economic opportunity for the partner. And for the FIs, obviously, that story we told upfront in the call certainly talks to what we're starting to see in terms of the economic and strategic value to them. And then obviously, our revenue share, I mentioned already. So yes, we're excited about it. It's continuing to grow and strategic impact and an economic value for all three of those constituents.

And the next question comes from the line of Adam Hotchkiss.

Great. Matt, I'd be curious how you think about the breadth of the platform as it stands today. There's clearly an expansion opportunity within the existing base that you mentioned in Q2 Innovation Studio, obviously, adds to that. But now that you're generating much more meaningful cash flow, are there any obvious areas customers are asking for that you look to invest in more deeply either organically or inorganically?

Adam, I mean I would say we're still early in the idea of this digital transformation, which is basically taking any human experience that any human interaction you have with the financial institution and digitizing it. And then data, AI, how are we going to approach that. All these things are things that we're diving into. But for us, user experience is critical and then you move through the commercial functionality, dynamic personalization. We have talked about it multiple times, fraud has gone through the roof. It was one -- it was a large regional bank. I won't say the name, CEO mentioned that he's accounting for $30 million of check fraud a quarter from the foreseeable future for the next couple of quarters, check brought back. And so that product was, I think, one of our top cross-sells in the year for fraud solutions. I'm going to have Kurt talk a little bit about what we're doing with AI. But also, the other thing to think about, and Terry talked about the [ same deal ] is Innovation studio. We have 160 partners that we can go and cross-sell to solve problems. So I don't have to go into this. I don't have to go invest in all of these different smaller solutions. I can partner with people and get a piece of the revenue, solve the customer's problem and provide them with the best solution. So it really has scaled. I think 100% of the deals in the quarter had innovation studio attached to them. We saw tremendous growth in innovation studio bookings in the first quarter. So we're going to continue to invest in user experience, commercial banking, fraud data. But maybe for a second, Kirk, you can talk about AI and how we're thinking about that because it's such a big initiative for us at the company.

Yes, I'll do it quickly. I mean we're really excited about the future and what that's going to bring to us and our customers. We really think about it in three big buckets. There's internal use of it, how we become more efficient for our own good, right? How do we embed it in our existing products. And then obviously, what are some of the new products that we might be developing. There's an important fourth bucket, though, in that Jonathan alluded to a second ago, which is innovation studio, where we have all these fintech partners that are also going to be building AI solutions into their offerings. And already, we see that in four categories in digital customer support and fraud and marketing and targeting and also insights and financial wellness. And so that's already not just in the pipeline but in the solutions that we offer through innovation studio. And if you just step back a little bit and think about in addition to the gigantic amount of digital banking data that we have and the millions of customers and users that log on every single day, over $5 billion a year. We also have in our relationship pricing the largest, what we think is the largest loan -- commercial loan book in the world, a data set in the world and the largest commercial deposit data set in the world. And that is highly structured data already because of the way that it's used by our customers everyday. So we think that all leads to a lot of crossover in terms of some of the solutions that we already have in market and what we could do there, but also in terms of some of the products that we'll deliver in the future.

Okay. Great. That's really useful. And then David, I appreciate the commentary on RPO and some of the lumpiness that can happen there quarter-to-quarter. Could you just remind us what rest of '24 looks like from a renewal cadence perspective maybe versus the same period last year? Just trying to get a better sense for how we should think about the RPO comps as we head through the year based on your visibility into renewals? I appreciate it.

Yes, sure, Adam. This year is not going to be different than most years past where we're going to see most of our renewals come into scope in Q4. So that's going to give us the biggest opportunity for renewals. We did see good renewal strength in Q1 and as we sort of look through the year, the one quarter that is relatively pressured from a renewal standpoint is Q3. So we have good renewals in scope for the remainder of the year with Q3 being the most pressured, Q4 being the quarter with the most opportunity.

Your next question comes from the line of Matt VanVliet.

Sure. But on the 90 banks that are using either commercial or retail but not the other. Do you have much of a sense or what the mix is that are using something, somewhat modern that's not just kind of the off-the-shelf from the core that might be a little bit more of a difficult competitive displacement or thought otherwise, maybe what's the opportunity of something that's not modern and should be an easier win?

I don't have that off the top of my head. I will tell you that what they certainly don't have is a single platform that I talked about earlier, which is they're running a separate system that requires separate upgrades, separate back-office administration, separate set of interfaces, separate user experience. And so when they move to us, they unify that experience both for the customer, they unify it for the bank employee and they unify it for the provider, which is us, in this case, and we can upgrade the software faster, give them -- and the data is all unified as well, which is what Kirk was talking about the importance of having that clean data. So the quality of the system, obviously, with our win rates and the deals we're doing, I would argue we have the premier solution in the marketplace. So whatever we're competing against is not going to have that. It's more about the inertia to get them to be able to go through the conversion process and can we prioritize that. And as we've talked about with the focus right now, it's about acquiring, retaining and growing deposits and driving efficiencies to the business. Our system is clearly coming up as a priority for these financial institutions to convert to, and that's why you're seeing the demand environment that we've seen over the last couple of quarters and in the first quarter.

All right. Very helpful. And then, David, when you look at kind of what the growth outlook is in the pipeline over the next couple of years? It seems pretty robust, and you're talking about a pretty big backlog of ARR, not yet live. Where do you stand at in terms of head count investments, whether it's around the implementation teams or the go-to-market team how -- where are we at in terms of the team that's on the field now ready to capture all the opportunity versus needing to add head count and then sort of wrapped in that, any change in philosophy around using outside partners for some of the blocking and tackling type situations on the implementations?

Matt, yes, first and foremost, I think we still feel strongly about our ability to scale our cost relative to driver revenue growth. So we'll stop on that. Having said that, on implementation, that's certainly one that we are going to continue to invest in head count there, while investing in efficiencies. We're doing things more efficiently with our customers. We're utilizing our global resources more effectively to lower the overall cost of an average implementation, but we still have to add resources given all the momentum we've seen on the booking side of things. Sales and marketing, we've gotten a lot more efficient there as well. And I talked in the prepared remarks about our ability from a tax standpoint to continue to get much more efficient, and we think we have more opportunities for efficiency and that doesn't mean we don't have to add some resources as we continue to grow the number of accounts that we're supporting. Matt talked a lot about the expansion opportunity in the call earlier. We need to have resources that are able to reach out and work with those customers to identify those opportunities and ultimately book them. on utilizing partners more effectively, we're constantly looking at ways to get more efficient. Partner utilization could be one of those. It's not something that we're committed to as of yet, but that's certainly one of the efficiency drivers that we're exploring going forward to improve the cost structure relative to the revenue that we're driving from a delivery standpoint.

Your next question comes from the line of Andrew Schmidt.

Good results here. Apologies, I jumped on a little bit late. Sorry if this has been asked. But could you just talk a little bit more about what's driving the Tier 2 resurgence, really good to see obviously, there's probably platform development, environmental things going on. But if you could talk about what's going on with the -- at that size of FI, that would be helpful.

Yes, Andrew, I think to some extent, we had solid Tier 2, Tier 3 performance last year. It was maybe a little overshadowed by some of the larger Tier 1s we got. We had a solid quarter-over-quarter with the Tier 2s and Tier 3 last year. But the performance, I would say is a lot of these financial institutions is just the time where they are on the pipe and coming up, but we've been building the momentum we have with them has been building and so they have the same challenges that the larger banks do. It's just a matter of our solution for them, it's a little bit bigger of a decision, as I was talking about earlier, the larger ones to do retail or commercial or small business these guys usually take into our platform. So the conversion for them is converting retail customers, small business customers and commercial customers. So it's a little bit -- it takes a little more time for them to get organized, make that decision. But we signed more Tier 2s and Tier 3s this quarter than we signed in any quarter and last year. And the -- what they're beginning to realize is not only do they have the advantage of being local, their rates are going to be just as competitive as the big four, but they're able to walk out there and use our technology as a way to compete with Bank of America, Wells, [ Jason ], Citi and their products, and we're hearing stories about wins, taking large accounts from them, whether it's municipalities, health care systems, larger companies, and they're going out and picking up this business because they have those advantages being local, being there to solve the problem for them and also being competitive on rates. So I think it's just a matter of they have to become more efficient and technology is going to be how they're going to compete and they go look at the systems, and we're the only single platform out there. We have more customers running on our commercial solutions, which work on mobile phones and tablets and desktops. And that's what you have to do to win the business. And so -- that's what's driving the demand environment. It's about acquiring, retaining and growing deposits. And we've shifted from a lending environment to get the deposits, and we've been in this business for 20 years in August, and we have a great reputation in taking care of our customers and building great products and being there for them. And so that's ultimately what is driving the demand.

Got it. Well said. I think the commercial platform is certainly a differentiator. If you could just touch on the pipeline for a second. I think a quarter ago, it seems like the pipeline was a little bit more balanced from a size perspective versus last year, to some extent, I think we see that coming through here. But maybe you could talk about the composition. Is that still the case? And if it is the case from an evenly balanced perspective that imply more visibility in terms of timing of deal close and bookings and things like that versus maybe the larger wins that can be longer and have more uncertainty?

Yes. I would say it was probably out of balance last year with the size of the deals we did in the back half of the year, Andrew. I mean it was steady Eddie in that Tier 2, 3. And in this quarter, like I don't want to go off over, we signed 4 Tier 1s in the quarter. So it was still a great quarter, but the Tier 2, Tier 3 make up. And you got to remember, a $4 billion bank comp is not that different than an $8 billion bank from an economic perspective. So yes, I mean, I think David can comment on whether we're going to see some of these go live faster. But like I said earlier, a bank that do on a retail small business and corporate conversion that's a $4 billion, $4.5 billion bank could end up being a 9- or 12-month go-live. But I think that you'll see with the expansion, some of the stuff coming to revenue. We're seeing things come to revenue a little quicker. Been happy with the results so far. I don't want to get ahead of us in a guide. David looks to me funny when I do that. But I think we have a lot of opportunity to -- in the pipe as well as in that Tier 2 space. and Tier 3 to win deals and get them wide a little faster than the largest deal in the history of the company that we signed last quarter, the big four bank for precision lender that we signed last year. So it should come to revenue faster. But Dave, do you want to comment on that at all?

Yes. Look, there's maybe 1 or 2 months for some of these deals that we'll see at the end of this year in terms of revenue recognition. But for the most part, the majority of this revenue is going to start coming through starting next year. And as I said, and I don't know if you were on yet, Andrew, I know you said you joined a little bit late, but we did talk a little bit earlier about sort of the shape of the bookings and how we see some of that manifest to revenue, particularly on the cross side. So some of the cross bookings or expansion bookings that we have, we'll see some revenue later in the year for those. And again, we were expecting some of that coming into the year. And then we have some immediate time to revenue like license expansion, where we saw a lot of strength during the course of the quarter. Matt mentioned the growth in Centrix specifically, but that's one of those areas where we get a fairly immediate revenue recognition on that. So feel good about the mix of expansion as well as net new and most of that net new you're going to see coming online '25.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.