Q2 Holdings, Inc.

Good morning. My name is Marcella, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Q2 Holdings Third Quarter 2020 Financial Results Conference Call. All lines will be placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. If you'd like to withdraw your question, press the pound key. I would now like to turn the call over to Josh Yankovich, Investor Relations. Sir, you may begin.

Josh Yankovich Thank you, operator. Good morning, everyone, and thank you for joining us for the third quarter 2020 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, included in our most recent quarterly report on Form 10-Q and subsequent filings, and the press release distributed yesterday afternoon regarding the financial results we will discuss today. Thank you for joining us today. 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 8K filed with the SEC yesterday afternoon. Let me now turn the call over to Matt.

Thanks, Josh, and thanks to everyone for joining the call today. Today I plan to provide a recap of our third quarter performance, followed by an update on our outlook for the fourth quarter and beyond. In the third quarter, we generated non-GAAP revenue of $104.8 million, up 31% year-over-year. We also added approximately 800,000 users in the quarter, bringing us to 17.1 million total registered users, a 21% increase year-over-year. Overall, I was pleased with the performance of the business in the third quarter. We continued to see a large number of users added to the platform through a combination of new customer installs and sustained organic user growth. As I've stated on previous calls, our delivery team has been performing at an extremely high level in this remote environment. This theme continued in the third quarter, where we had a record number of new digital banking customers go live on the platform, On the sales side, performance in the quarter was consistent with the themes we discussed on our last earnings call. Net new activity was slower than normal as financial institutions continued dealing with the many distractions brought on by COVID. Nevertheless, our net new sales team turned in a solid performance that included some banner wins. Also, our cross-sale and renewal teams had another strong quarter which helped offset some of the slowdown on the net new side. and finally, I believe that our overall financial performance for the quarter serves as a great reminder of the underlying strength of our business model. Despite the unprecedented times in which we find ourselves, we continue to sustain high levels of revenue growth while steadily improving the profitability of the business. And as such, I remain optimistic about our performance in 2021 and beyond. Now I'd like to provide a bit more detail on our sales execution from the quarter, along with an update on what we're expecting moving forward. On the digital banking side, the team performed in line with our expectations. One of the highlights from the quarter was a top 10 global financial institution signing a contract for our card swap product, which helps financial institutions get their cards to top of wallet for subscription services. Rolling card swap out with a customer of this size certainly helps validate the demand for this product and generate momentum for us. It will also help us drive continued improvement to the functionality and user experience of the solutions. which will benefit all of our customers. Our lending teams had a strong overall quarter, including a North American Tier 1 financial institution that selected Q2 for our loan pricing solution. This solution will help their commercial lenders analyze their pricing mechanisms and decisions. This is a particularly exciting win because it demonstrates the value of the pricing data we have curated, and we're already engaged with the customer to potentially expand the relationship. It's worth noting that in Europe, one of the regions where we sell our lending solutions, I believe it's taken even longer to adapt to the current environment, particularly given that many European countries have reentered more serious lockdowns in recent months. So while decision-making was slower than we anticipated in this region in the third quarter, our pipeline suggests an uptick in new deals in 2021. As a reminder, international revenues are a non-material portion of our total revenue, but we do believe Europe represents a strategic growth opportunity for us over the long term. Our banking as a service team also had a solid quarter, including one particularly noteworthy deal in which one of the largest U.S. fintechs selected our cloud-based core as their system of choice to support a new digital-only bank initiative. As is often the case with Q2 Basswinds, this is exciting because we believe there's significant, long-term opportunity to grow with this partner as they work to drive adoption. We hope to be able to share more about this partnership in the future as this customer nears their public launch. Next, cross-sales and renewal activity within our existing base was strong yet again, which helped to mitigate some of the slowdown we've seen in the net new market. The cross-sale activity is happening within both our banking and lending customer bases. In the digital banking arena, our Centrix risk management product line has been a substantial contributor, accounting for nearly a third of the total cross-sale bookings in the quarter. And on the lending side, we had two significant renewals with global banks, which we view as an endorsement of the strategic value of our lending solutions with even some of the world's largest financial institutions. In general, I'm incredibly proud of the way that we weathered the storm as a team. The quarter played out largely as we expected, and in spite of this, we were still able to exceed our COVID-adjusted bookings expectations. As we head into the fourth quarter in 2021, our expectation today, based on feedback from customers and our sales teams, is that we should see improvements in the predictability of purchasing decisions and a corresponding steady increase in bookings over the quarters ahead. and because we believe many of the deals we've been working have simply pushed out into the future rather than being canceled altogether, I'm optimistic about the state of our pipeline across our lines of business. Since our inception, we've considered land and expand a key component of our growth strategy and I believe our cross-sale performance indicates that the strategy is alive and well and has played a vital role for our business in recent quarters. Thank you for joining us. It equips us to approach multiple lines of business within a financial institution, giving us a large surface area to land new customers wherever they are in their digital transformation. And as we continue to integrate our major solution set, we believe the value proposition for our customers to start with one product and expand over time becomes even more compelling as we share data across these systems to create better experiences for account holders and drive efficiencies and more informed decision making for our customers. We started to see this type of expansion gain momentum in recent quarters as our sales teams became more familiar with products across the portfolio. And we are continuing to properly align our sales efforts so that we can continue driving this trend. So in the quarters to come, we expect to see this cross-pollination continue to be a driver of our bookings performance. The breadth of our portfolio also creates substantial runway to develop new, highly differentiated innovation. As we integrate key aspects of our product suites, we're able to deliver compelling and cohesive features and functionality that due to the often siloed nature of legacy technologies, differentiate our products from those in the market today. We had one such example in the quarter, what we're calling our Treasury Onboarding Solution. In general, the comprehensive onboarding of customers remains a major opportunity for digitization, particularly on the commercial side, where onboarding a new client requires greater documentation. Today, many commercial financial institutions rely on a combination of paper-based processes and legacy technologies that they must string together to onboard a new commercial client, a process that within some customers can take as much as 30 days. This is a suboptimal experience for many new commercial clients. By connecting key components of our commercial digital banking offering with elements of our account opening and lending solutions, our teams developed an end-to-end commercial enrollment tool to materially improve this critical process. Treasury onboarding helps digitize both the backend and customer facing processes of onboarding a commercial client, which can substantially reduce onboarding time and in turn increases the productivity of commercial banking staff. Solutions like this that can replace multiple technologies and manual processes and have a quantifiable impact on time to revenue for customers are possible through the integration of our cloud-based, data-first technologies on both the deposit and lending side of our customers' businesses. And we believe these types of products can create quick expansion opportunities. For example, shortly after launching Treasury Onboarding, one of our largest digital banking customers, a top 50 North American bank, chose our Treasury Onboarding solution and is in the midst of implementing it as we speak. We've talked about the strength of our corporate banking offerings in recent years, and combined with our commercial lending capabilities, treasury onboarding gives us yet another vector to land with key commercially focused financial institutions. And finally, helping customers harness and make decisions using data remains a core component of our product philosophy. We believe the data we collect from pricing more than $2.5 trillion in commercial lending data and transactional banking data behind nearly 2.5 billion logins through the first nine months of the year alone creates a lasting competitive advantage for Q2. and we have a proven track record of turning that data into tangible innovation whether it's on the digital banking side with marketing and security tools or in lending where our commercial lending data helps lenders make more informed and more profitable loans. So we believe data will continue to be a driver for expansion activity and another differentiator in net new deals. Now, as I conclude my prepared remarks, On our third quarter performance, I wanted to briefly address a piece of news we disclosed in a press release issued yesterday afternoon. Jennifer Harris, our Chief Financial Officer, is planning to retire in the first half of 2021, with David Mihawk joining Q2 as our new CFO. I'll let her share more information, but for now I want to thank Jennifer for her unparalleled contributions to Q2, our customers, our employees, and our shareholders over the past eight years. You will never find someone who is harder working and of higher integrity than Jennifer, and Q2 would not be the company it is today without her. She's been a great partner and an even better friend, and I will miss her dearly. I know she's doing what she needs to do to spend time with her family and enjoy a well-deserved retirement. So, Jennifer, thank you so much, and I'll hand the call over to you.