Q2 Holdings, Inc.

Good morning, my name is Lisa and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings first quarter and 2020 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, please press the pound or hash key. Please limit yourself to one question only. If you require any further assistance, please press star zero. Thank you. I will now turn the call over to Steve Koch, Director of Investor Relations. Sir, please begin.

Thank you, Operator. Good morning, everyone, and thank you for joining us for our first quarter 2020 conference call. With me is Matt Flake, our CEO, and Jennifer Harris, our CFO. This call contains forward-looking statements that are subject to significant risks and uncertainties. Thank you for joining us. 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 in this call will be on a non-GAAP basis. Thank you, Steve, and thanks to everyone for joining the call today. Obviously, we are in unprecedented times. The rapid spread of the coronavirus has forced all of us to change how we work, live,

So on today's call, I will provide a brief update on our first quarter performance, but I'll spend the majority of my prepared remarks discussing the impacts of the COVID-19 pandemic on our employees and our customers and how we are responding. Before I begin, I'd just like to say that I'm incredibly proud and encouraged by how our employees have responded to this crisis. It's in trying times like these that we rally around our missions. and I'm inspired by the work our teams have been doing to expand and ensure availability of critical digital banking systems while working almost entirely remotely. I would also like to thank all the first responders and healthcare professionals who every day put themselves in harm's way to protect and care for those afflicted with the virus. With that, let me briefly go through our first quarter performance. In spite of the current macro environment, the first quarter was very positive for the business. Our strong start to the year carried us through the final 30 days of the quarter, by which time shelter-in-place had become the norm and a vast majority of employees across the globe began to work from home. We generated non-GAAP revenue of $93.8 million in the quarter, up 32% year-over-year. We also added approximately 800,000 users in the first quarter, bringing us to 15.4 million total registered users, an 18% increase year-over-year. The user growth during the quarter is made more impressive by the fact that our employees spent a third of the quarter working remotely, and nearly half of our new customers were implemented in March, demonstrating the strength of our delivery teams, the quality of our solutions, and our ability to execute projects in the current environment. On the sales side, we had a strong mix of net new and cross-sale activity, demonstrating continued cross-pollination in the portfolios. We built on our bookings growth from past quarters and continued to execute new and cross-sale deals throughout March. We added two new Tier 1 customers on the digital banking side, one corporate-only deal, and the other purchasing both retail and corporate along with Grow for new account opening and Centrix for risk management. In addition to the Tier 1s we signed on the digital banking side, we also had two Tier 1 wins in the digital lending space, including a precision lender deal, and one of the largest cloud lending deals in their history. In addition to these new customer wins, we saw an existing Tier 1 corporate customer purchase our retail solution during the quarter. We believe wins like this continue to demonstrate our meaningful land and expand opportunity within the Tier 1 segment. Much of our cross success came from customer renewals, and I'm encouraged that customers are extending and expanding their digital banking relationships with us at this time. For millions of account holders, digital banking is suddenly a requirement, not an optional service channel. Working with customers to ensure the availability and quality of digital service has never been more critical, and it's a responsibility we take very seriously. Now I'd like to spend some time discussing the COVID-19 impact to our market and our business. I'll start by discussing what we are doing to protect and enable our employees, whose health and productivity remain at the forefront of our planning. The vast majority of Q2 employees around the globe have been working remotely since March 3rd. Remote work is an important part of our daily operating model and culture, and we are well accustomed to using digital tools to operate our business, deliver to our customers, and continue to drive innovation. We also implemented restrictions on all non-essential business travel. In place of travel, we are constantly using technology to maintain relationships virtually with customers and prospects. and we believe that this will help mitigate the impact on deal and project timing. Since early March, we have hosted more than 50,000 virtual meetings, both internally and with our customers. We are currently planning for restricted travel and remote work for the foreseeable future, and we believe we can continue to operate the business effectively in such an environment. Finally, we are being more cautious in our spending and have slowed hiring. though we are continuing to invest in our business and seeking to capitalize on opportunistic strategic talent when available in the market. Now I'd like to discuss what we are hearing from our customers. Since early March, we have been in direct contact with substantially all of our customers, and a few themes have emerged. It's clear that many financial institutions have key processes and functions that are still very branch-dependent. They rely on older systems that provide employees with limited access outside of the branch. and while our customers have made tremendous progress in enabling digital customer experiences for things like opening an account or applying for a loan, many of those underlying processes still require some degree of branch or in-person intervention. Despite our delivery team's remote capabilities, as a result of some of our customers' remote access challenges, we are seeing some slowdown in the scheduling and execution of the second quarter projects. We're finding that some FIs have difficulty remotely executing on larger projects like new implementations. The scope and duration of these delays varies by customer, and we are monitoring this on a daily basis as we learn more and our clients continue to deal with urgent initiatives stemming from COVID-19, including the PPP, remote work, and general business continuity and safety. The good news is, as I've always said, our customers are typically healthy, progressive financial institutions. We look at the valor rating system, a one-to-five scale that measures financial institutions' overall health, with the five being the strongest, as a general measure of our clients' position in the market. The average valor rating across our digital banking customer base is 4.8. So I believe our customers are in a strong position to weather this situation, which we believe, in turn, should limit the risk to our business in this environment. In terms of engagement, we shifted our annual customer conference, Connect, Thank you for joining us. We have adjusted our second quarter bookings expectations down to varying degrees across all of our lines of business. In spite of the distractions around the current operating environment, our customers are demonstrating a clear desire to expand their relationships with us in a time when digital is so critical. So we are expecting the impact to our second quarter cross-sale target will be less impacted than net new. We expect the impact of COVID-19 on our bookings to vary by the type of customer we serve and the solutions that they purchase. As such, I wanted to provide additional commentary on our key customer segments. These comments apply both domestically and internationally, particularly in the enterprise space where we have the most international activity. And unless otherwise specified, these comments apply exclusively to the second quarter where we have the most visibility today. I'll start with enterprise accounts. Financial institutions above $50 billion, where we have particular traction with cloud lending and precision lenders. Here, we have seen a substantial slowdown in recent weeks as these larger companies were among the earliest to adjust to the new macro environment. As a result, we've seen in-flight opportunities put on hold while these institutions grapple with global challenges and their own internal allocation of resources. That said, I still believe we're in a very strong position to win many of these opportunities once the dust has settled on the present situation. We were in the contract phase with a number of these enterprise opportunities, and I fully expect that we will resume our discussions once we are back in a more normal environment. Tier 1 institutions, those between $5 and $50 billion, are reacting slightly differently. What we're seeing is that many of our in-flight opportunities are progressing, albeit at a slower pace given the circumstances. That said... Fewer of these institutions are entering into large digital evaluations at this time, which means fewer new at-bats for our Tier 1 teams. And we're adjusting our second quarter Tier 1 pipeline expectations accordingly. In the Tier 2 and 3 space, those financial institutions under $5 billion in assets, we're expecting a slowdown of the existing opportunities and new pipeline. These institutions generally have fewer resources and are more focused on the immediate impacts of the pandemic. Things are more fluid in the fintech and all finance markets. I expect the larger, more established fintechs will see this as an opportunity to go on the offensive and add to their product capabilities while earlier stage companies will focus on their existing products and users. We believe our lending and banking as a service capabilities position us well to work with fintechs looking to advance the ball in the coming months. Now let me provide a few key updates on what we have done since March and what we are focused on in the coming months. to help our customers through this crisis. I'll start by highlighting that many of our customers have a key role in the administration of small business loans resulting from the new Paycheck Protection Program. While the PPP is an immediate opportunity for our customers, these financial institutions are scrambling to execute the application, decisioning, and disbursement processes digitally, with no in-person intervention required. The Q2 Cloud Lending Team created an end-to-end PPP solution designed to help financial institutions conduct the entire application and disbursement process digitally, while keeping robust records for loan forgiveness down the road. This solution can be deployed in a matter of days and has already aided in the process and funding of these SBA loans for a number of our customers. Another key area of focus for us has been helping drive education and adoption of our customers' digital capabilities. With in-branch traffic all but eliminated, we believe the time is now for them to drive further adoption of digital capabilities. We are ramping up our assistance here by providing turnkey marketing packages that financial institutions can use to drive enrollment in digital banking and drive adoption of specific, critical features like remote deposit capture and skip-a-payment functionality. Finally, our hosting teams and infrastructure are more critical than ever. The first thing we hear from most customers is that uptime is their highest priority. With the rise of digital banking in this time of social distancing and the disbursement of the CARES Act funds, we've seen record levels of logins and usage across our platform. In the months leading up to the crisis, we may have seen a total of a million logins in a single day. In recent weeks, when stimulus checks were issued, we had days where we exceeded a million logins per hour on multiple occasions. We believe our teams have responded well to this surge and we have some of our best engineers dedicated to managing through these high volume windows. Given their ever increasing importance on system availability and record level demand on these systems, we are making incremental investments in our hosting and infrastructure capacity. Looking beyond the next few months, there are a few themes that I believe will be of critical importance, both for Q2 and the financial institutions we serve. Overall, I believe this crisis will serve as yet another catalyst for digital transformation. In my view, there will be some permanence to this sudden, mandatory shift towards digital. The current situation has highlighted that much of the digital transformation of financial services has been focused on the customer experience layer. As I mentioned earlier, the shutdown of branches has uncovered that many back-end processes and technologies are still dependent on a 9-to-5 brick-and-mortar banking model. So financial institutions are finding that using technology to improve the business processes that underlie the customer experience is critical to serving their customers in today's environment. It's more than a channel. Digital is the way banking must be done in today's environment. When we emerge from the current situation, I expect more financial institutions to rapidly explore and invest in using technology to innovate even further. I believe things like fully digital account opening and loan facilitation for their customers and their staff will become the norm. And with the key investments we've made in these areas, I believe we are extremely well positioned to assist with the next wave of digital transformation. Another question we've heard from many customers is how can I sell or provide personalized service with no in-branch interaction? Over the past few years, we have seen branch traffic diminish and digital engagement grow. It's been our belief that the insights we can generate from the data will be the primary method of understanding customers' wants and needs. It's with this in mind that we've built solutions like Q2 Smart for Marketing and Q2 Sentinel for Security, both of which leverage behavioral data to help our customers better serve their account holders. In addition, we believe that the Precision Lender Suite, with its rich lending data sets and data-driven loan coaching, Thanks, and with that, I'll hand the call over to Jennifer.