Q2 Holdings, Inc.

Good morning. My name is Phyllis and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings second quarter 2021 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. At that time, if you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Josh Yankovich, Investor Relations. Sir, please begin.

Thank you, operator. Good morning, everyone, and thank you for joining us for our second quarter 2021 conference call. With me on the call today is Matt Flake, our CEO, and David Mihawk, 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 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. 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 8K filed with the SEC yesterday afternoon. Let me now turn the call over to Matt.

Thanks, Josh. I'll start today's call by sharing our second quarter results and highlights from across the business. I'll then turn it over to David to discuss our financial results in more detail, as well as guidance for the third quarter and updated full year 2021. In the second quarter, we generated non-GAAP revenue of $124.2 million, up 26% year-over-year and 6% sequentially. We also added over 500,000 users sequentially, resulting in a year-over-year increase of 16%. That brings us to more than 18.8 million total registered users on our digital banking platform. Overall, we had an encouraging quarter of activity across the business. We signed key deals across our product lines, announced an important new offering that we believe will build on our competitive advantage in the market, and we continued to execute at a high level in delivering our solutions. Although we continue to see uncertainty around the timing of purchasing decisions, we believe that a return to more normalized living and working conditions will help the market improve, which we are already beginning to see by an increase in customer evaluations of digital solutions and growth in our pipeline. So we're pleased that we're seeing expansion in the number of opportunities across all areas of our business. And as we look ahead to the back half of the year, we're optimistic that overall deal activity in the space will begin to return to pre-pandemic levels. We also saw a resurgence in M&A activity within the banking space in the first half of the year, which we view as a positive for our business. Of the 22 mergers or acquisitions announced in the first half that involved a Q2 digital banking customer, we were on the acquiring side in all but one instance. This reinforces a belief we've long communicated that because we tend to partner with financial institutions that are strategically looking to grow and are forward-thinking around digital transformation, Q2 customers are often on the acquiring side of M&A transactions. If the acquiring company rolls the new entity onto their existing digital banking solution, these events can result in incremental users being onboarded without going through a typical sales or implementation process. While the timing of revenue from M&A is difficult to predict, we are optimistic that this recent M&A activity in the industry will benefit our business, which we find especially encouraging considering the industry-wide slowdown in decision-making we saw during the pandemic. We also view it as a testament to the quality and breadth of our customer footprint. Transitioning to our sales performance in the quarter, we signed key net new and expansion digital banking deals, achieved broad-based success within digital lending, and continued to build momentum in the banking as a service arena. On the digital banking front, we won a highly strategic credit union deal in a competitive scenario. This credit union has a sophisticated internal product team, so finding a provider with a strong base platform and the ability to extend that platform was a priority. Our Innovation Studio solution, which I'll discuss in more detail shortly, was a key differentiator for this client as it provides them the flexibility to personalize the digital banking platform according to their own timeline and member feedback. In the past, we've discussed a growing trend in credit unions increasingly expanding into business banking, and our end-to-end digital banking platform has put us in a competitive position to capitalize on this shift. That was the case in this deal. where the combination of our platform's retail experience and our feature-rich commercial suite was another important selection criteria. We also continued to generate meaningful expansion opportunities across our customer base. A good proof point from the quarter was a $3 billion credit union that renewed their existing retail digital banking agreement, while also adding our corporate banking solutions. We believe examples like these demonstrate the growing value of our broad solution portfolio and our ability to leverage that breadth to deepen relationships with existing customers. We had several banner wins on the lending side of the business in the second quarter, and I'm pleased with our traction, especially in North America. With the events of the last 18 months, we're seeing financial institutions put an increased emphasis on streamlining their internal lending processes in order to provide a more competitive borrower experience. And our loan origination solutions are a natural fit for lenders looking to digitally transform their capabilities. The first deal I'll highlight was a loan origination win with an enterprise top 30 U.S. bank. This is an important deal from a strategic standpoint as it helps demonstrate the quality and scalability of our origination solutions in the enterprise segment. We also believe this will add momentum to our North American sales efforts. It also gives us a foothold with this bank, and we're optimistic that this initial relationship will create expansion opportunities for us. As an example, this bank also made the decision to purchase our ClickSwitch solution in the quarter, which is intended to help the bank become the primary financial institution for their retail customers. In addition to our loan origination success, we continue to build traction with our loan pricing, data, and sales coaching solutions. A representative win in the quarter was with the Tier 1 Top 100 U.S. Bank, which not only purchased our loan pricing solutions, but also opted to add our Centrix risk management products. Another example of our product breadth creating additional opportunities for us. This bank is looking to utilize our technology to create a competitive advantage and will use our loan pricing solutions to empower the relationship managers with valuable pricing data and coaching. allowing them to design more profitable, competitive loans in real time with their borrowers. We also signed a loan pricing agreement with an existing Tier 1 digital banking client. This is our expansion model in action. Our goal has always been to win a customer, run successful projects with them, and earn more of their business over time. Given the breadth of our product set today, we're now in a position to partner with our customers on both sides of the balance sheet, no matter where they are in their digital transformation journey. So when this client expressed an interest in providing loan pricing data to their commercial lenders, we were in a great position to partner with them on this initiative. Our banking as a service team also had a solid quarter of activity, partnering with FinTechs in new verticals that are driving innovation in financial services. One such win in the quarter was with NYDIG. a leading technology and financial services firm dedicated to giving U.S. consumers far easier access to buy, sell, and hold Bitcoin. This is an exciting partnership for us on multiple fronts. First, as a banking as a service client, they'll leverage our vast platform to power their new payroll offering for corporate customers, aimed at giving U.S. employees the ability to allocate a portion of their paycheck to investing in Bitcoin, the first such offering in the country. And beyond our banking as a service relationship, we announced a collaboration to make NYDIG's custodial functionality available to Q2's digital banking customers as well, which will give our financial institutions customers the ability to offer Bitcoin services to their account holders. Expanding on innovation, we formally announced the Q2 Innovation Studio in the quarter, the culmination of years of hard work from our teams and input from our customers. Built on our award-winning SDK, the Innovation Studio allows our customers to extend and personalize their digital banking platform, either with in-house developers, outside development partners, or a library of pre-integrated fintech partners. Traditionally, financial institutions have been dependent on their vendors to deliver new products, third-party integrations, or custom functionality. As the pace of change continues to accelerate in the industry, Q2 Innovation Studio empowers our clients to rapidly design, develop, and distribute innovative solutions to their account holders. And the initial feedback from our customers has been extremely positive. As the Chief Product Officer for Stanford Federal Credit Union put it, we feel very empowered. For our size, our ability to execute on our vision is a differentiator. With Innovation Studio, Q2 has developed a true partner approach. We are also seeing a strong reception from partners for whom our network of customers and end users provide a potentially valuable and rapidly accessible distribution channel for their products. Although we just formally announced Q2 Innovation Studio, we already have more than 25 fintech and development partners leveraging it today. And as that number grows, the value the Innovation Studio can deliver to customers will grow as well. By leveling the playing field and empowering our customers with equal access to technology, we believe the Innovation Studio is a powerful contributor to our mission. And with its ability to help customers differentiate and deliver innovation rapidly, we believe Q2's Innovation Studio will give us a meaningful competitive advantage, more engagement opportunities, and drive high levels of customer satisfaction for years to come. Shifting to product delivery, our teams continue to execute at a high level during the second quarter. One go-live event from the quarter was particularly noteworthy, a coordinated launch with six financial institutions all owned by the same holding company that is one of our largest digital banking clients. This launch was a tremendous effort from our team, and I believe our track record in delivering solutions to sophisticated customers with complex environments continues to set us apart from competitors. So when you combine our delivery execution with the expansion of the product portfolio and key wins on the sales side, we're pleased with the quarter and feel we're in a strong competitive position as we enter the back half of the year. With that, I'll hand over the call to David to walk through our financial performance. Thanks, Matt. And good morning, everyone. As we hit the halfway mark of the year, we're pleased with our execution and effectively bringing deals to revenue and our ability to deliver organic growth in the business. which has helped yield strong overall revenue growth exceeding the high end of our guidance. We continue to grow investments in our solutions, support, delivery, and people while driving efficiencies, which have resulted in adjusted EBITDA also exceeding the high end of our guidance. I'll begin by reviewing our results for the second quarter of 2021 in more detail and conclude with updated guidance for the third quarter and full year 2021. Total non-GAAP revenue for the first quarter was $124.2 million, an increase of 26% year-over-year and up 6% sequentially. Both the year-over-year and sequential increase in revenue was largely the results of growth in subscription revenue, driven by new customer go-lives and organic user growth. In addition, the year-over-year increase was also due in part to go-lives associated with cross-sold products. Year-over-year and sequential revenue growth also benefited from the contribution of Quick Switch, which we acquired on April 1st. Transactional revenue represented 14% of total revenue for the quarter, consistent with the prior year period and previous quarter. Within transactional revenue, we're seeing an increasing contribution associated with the BAS business. which includes interchange as well as pass-through fees for debit transactions. This increase in revenue from the Bass business, combined with continued slowing growth in traditional bill pay revenue, has resulted in transactional revenue as a percentage of total revenue remaining constant. Turning to backlog, we ended the quarter with approximately $1.3 billion in total backlog, a 4% increase year over year, and a sequential decline of $15 million. The year-to-year increase in backlog was largely the result of bookings added through renewal opportunities with our existing customers, as well as the contribution of net new bookings. As I mentioned in last quarter's earnings call, we believe that backlog growth will be pressured in 2021, in part due to our proactive approach and success in 2020. in renewing existing customers, which resulted in fewer customers targeted for renewal in 2021 relative to 2020. We remain confident that net new bookings are going to be a bigger contributor to backlog this year compared to last, but we could continue to see pressure in the total backlog dollars due to the impact from fewer renewals in 2021. Gross margin for the second quarter was 51.9%, down from 53.9% in the second quarter of 2020, and down from 52.6% in Q1 of this year. The year-over-year decline in gross margin was primarily attributable to expenses associated with the addition of implementation resources, which continue to benefit our effectiveness in delivering solutions. We also increased investments focused on maintaining best-in-class security and uptime for our customers. The sequential decline in gross margin was also impacted by a higher mix of transactional pass-through revenue in the second quarter. Total operating expenses in the second quarter were $57.9 million, or 46.6% of revenue, compared to $48.3 million, or 48.8% of revenue, in the second quarter of 2020. and $54.9 million or 46.9% of revenue in Q1 of 2021. The year-over-year and sequential reduction in OPEX as a percentage of revenue were driven by efficiencies in supporting growth in our business with G&A showing the greatest decline in expense as a percent of revenue. R&D exhibited the most pronounced OPEX growth as we continue to invest in our solution. such as Banking as a Service and Q2 Innovation Studio. We feel strongly about continuing to invest in open solutions like these to benefit our customers, Q2, and ultimately expand our addressable market. Another driver of the sequential increase in R&D came from incremental headcount onboarded during the quarter related to the acquisition of QuickSwitch. Adjusted EBITDA was $9.9 million, up from $8.1 million in the second quarter of 2020, and flat sequentially. The year-over-year increase was largely attributable to maintaining a balanced approach to cost management, resulting in operating expenses scaling below the growth rate of revenue, which more than offset both the increased OPEX contribution from ClickSwitch as well as the decline in gross margin. We ended the quarter with cash, cash equivalents and investments of $411.3 million, down from $528.6 million at the end of the first quarter of 2021. This declining cash was attributable to the acquisition of Quick Switch and the repurchase of the majority of the remaining 2023 notes we announced during the quarter. In total, these transactions reduced our cash balance by more than $120 million. Cash flow from operations was $11.5 million in the second quarter compared to a use of cash from operations of $5.5 million in the first quarter. In addition to disciplined working capital management, the sequential improvement was due in part to the timing of payments for large vendor contracts. as well as our annual bonus payout and payroll taxes associated with stock vestings, which were both paid out in the first quarter. We incurred net capital expenditures of $8.3 million and generated free cash flow in the quarter of $1.7 million. As a reminder, in the third quarter, we will make the final payout of our termination agreement with Stone Castle, totaling approximately $7.6 million. Now, let me wrap up by sharing our third quarter and updated full-year guidance. We forecast third quarter non-GAAP revenue in the range of $125 million to $126.5 million, representing year-over-year growth of 19 to 21 percent. And we are increasing our guidance for full-year revenue to $497.5 million to $499.5 million, representing year-over-year growth of 22% to 23%. We forecast third quarter adjusted EBITDA of $6.2 million to $6.8 million. And we are increasing full-year 2021 adjusted EBITDA guidance to $33.2 million to $34.7 million. We delivered better than anticipated financial results in the second quarter through effective and timely delivery of our solutions to our customers. And we are increasing our guidance for both revenue and adjusted EBITDA for the full year. We continue to invest in strategic opportunities, which we believe will benefit our customers and create long-term value. we are able to fund a portion of these investments through operational efficiencies and have confidence in our ability to continue executing in the back half of the year. With that, I'll turn it back over to Matt for some closing remarks. Thanks, David. In closing, we continue to see signs of improved business momentum. We had important sales wins across our lines of business, adding strategic new clients in digital banking, loan origination and pricing, and banking as a service. while continuing to expand existing relationships and execute on cross-pollination opportunities we continue to further differentiate our solution portfolio with products like q2 innovation studio which enable financial institutions to design develop and distribute innovative solutions to their end users more quickly than ever before looking ahead we're encouraged that our market is beginning to improve We're engaged in more and more sales opportunities, creating a strong pipeline, and we expect prospect and customer decision-making timelines to improve through the end of the year. Thank you. And with that, I'll turn it over to the operator for questions.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Tom Roderick with Stiefel.

Hey, everybody. Good morning. Thanks for taking my questions. Matt, I wanted to kind of put a little bit of a finer point on the backdrop of the business environment here. I mean, I'm looking at the numbers. They're very good. You're beating expectations, you're raising guidance, and a lot to be excited about there.

But it did seem like perhaps in your comments you were pushing a little bit of caution, and maybe that's just near-term decision-making versus, you know, the pipeline building and things of that nature. And then, David, I'm just trying to marry that to backlog that would be down sequentially.

So can you put a little bit of a finer point on what you're seeing with respect to new deal activity and the pace of decision-making versus what's in the pipeline and, you know, enthusiasm for what might be coming in the second half? Yeah, thanks, Tom. We are being cautious about, you know, this is our fifth quarter, I guess, in the pandemic, and we've had to adjust and deal with the distractions that come with that. But we are beginning to see, you know, we had a good quarter. If you look at it, an enterprise deal, two tier ones, had a really tier two on the digital banking side that looked like a resembled a small tier one. So there was good activity, had some wins, but at the end of the day, we're beginning to see people coalesce around decisions in the Tier 1 space and the Tier 2 space on the digital banking side. It's also starting to come together on the lending side as well in North America. So it's just – it's kind of, I guess, five quarters of explaining that we're in a pandemic and trying to be cautious, but it certainly feels like – we're beginning to see some decisions come together in the back half as i said in the prepared remarks should look like pre-pandemic numbers and we're hoping to build on the momentum uh from that into 22 so just trying to be cautious and transparent with with what's going on like we've always been But it feels like things are starting to come together. I'm only going to do this once, but I got to put the Delta variant caution out there. And whether it's that or the response to it, and that'll be different depending on the geographies you're in. But that would be the only thing that I would say, you know, I can't. i can't forecast that piece but it feels really good i like the activity that we had the pipeline numbers just because i'm sure they're going to come up we're up 36 percent um our demos are up 36 percent from the fourth quarter of last year uh we're looking at uh you know much better numbers rfps are up 14 percent sequentially 40 percent over the fourth quarter of 20. so We're beginning to see that activity come together. I feel like we're well positioned in a lot of the deals. And we're also, you know, we continue to talk about this expansion opportunity within the existing base of customers that we've built. So all of those things feel good. Just want to have the, you know, the pandemic caution. We're going to get back to what normal looks like or pre-pandemic looks like. So it looks good, David. Yeah, Tom, and on the backlog side of things, we talked last quarter a little bit about the fact that we thought backlog would be pressured this year. We saw an unprecedented number of renewals. We really need about a third of our customers last year. And when you look at the mix of renewals, of bookings overall, Historically, if you go pre-pandemic, we've had approximately two-thirds to three-quarters of our new bookings coming from either new business or cross-sell. That was down closer to 50% last year. So what we're seeing now is we're back in that pre-pandemic historical range. So we feel good about how the business is projecting at this point, but that's sort of some of the drivers of backlog. With the CARES program and some of the renewals we did last year, we certainly feel like this year is going to be a little bit of pressure from a backlog standpoint. Yeah, makes good sense. And thanks for the clarity. That's really helpful. One quick follow-up. So, you know, the banking as a service, the bass piece, it's hard not to be enthusiastic when you talk about some of these different winds and different verticals. I think last quarter you talked about credit karma. At what point does this start to move into a place where it impacts the numbers a little bit more and I guess even in particular, David, I'd ask you about the gross margins, because I think about pass-through and interchange. Those seem to be sort of pure margins. So it would seem like you've got the pieces on the chessboard and sort of just waiting for the transactions to turn on a little bit. What drives that, and when do we sort of start to see an impact that might even start to move gross margins up a little bit? Yeah, Tom, and it's a good analogy, actually, with chess, because it isn't checkers. It's going to take longer to play out. But the way that this typically transpires is we win one of these opportunities, then they launch the program. We talked about that pretty extensively last quarter. When these programs are launched, what's going to happen is there's going to be a decent amount of pass-through fees that we have. And so those are obviously low margin, in fact, no margin fees. And then once those pass-through fees happen, you start to see a gradual increase in mix over time of interchange fees, which are going to be based upon the transactions that are taking place with the cards that are issued. We saw the program launches that we had referenced happen in Q2, and we're obviously still seeing it now. So there's a larger percentage now of those pass-through fees happening. But over time, we feel like we're going to have a much more meaningful lift to gross margins associated with the interchange fees. But it is going to be a two to three year time horizon as we start to see this become more and more meaningful. It's not something that's going to happen over the course of a few months or even a few quarters. Yeah, that's great. I'll jump back in the queue. Thank you, gentlemen.

Your next question comes from the line of Terry Tillman with Truist Securities.

Hey, good morning, Matt, David, Josh, and everyone else at Q2. Thanks for taking my questions. Matt, it's always good to hear about new innovation, and so I would love to hear a little bit more about the Innovation Studio. You know, is this kind of like a low-code framework? And just a little bit more about the studio technology and the monetization, and I had a follow-up for David. Yeah, Terry, thanks for the question. For us, really excited about it. This isn't something we did last quarter. We've been working on this for quite some time. If you think about it, it really does four things for us and our clients in particular. Number one, speed to market allows us to get, they're able to get whatever technology they want integrated up and running faster, whether we do it, they do it, or a third party does it. That helps drive differentiation and unique experiences to their users, whatever it might be, whether it's for a business function, a retail function. So you're driving a unique experience that allows them to drive their brand. Third thing is driving more engagement. It will drive more utilization of the product. It will drive more logins, more activity, different activity. It could be accounting software. It could be payables. It could be CRM that we're going to integrate to. And on the technology side, it's basically SDK. It's open to third parties to work with. But one of the parts that's very interesting here is the revenue piece, which is there is a revenue share that goes on between the providers, the financial institution, and us. And so we are moving this model from I'm going to extract as much money as possible out of a bank or a credit union, which we are trying to help exist, compete, and differentiate and be a part of this economy to now we are talking about how much revenue are we going to split from products that they're selling to their customers or they're generating revenue from. So as others are really pushing to drive ARPU up by selling more products and taking more money from their clients, our conversations have shifted to we can help you generate revenue which is very important in this interest rate environment that we're in. Non-interest income, it gets the CEO's ears. So very excited about this. It's early, but there's a lot of activity in it and a very strong reception to it in the marketplace. I'm very excited about it. That sounds great. It sounds like it's competition to Jonathan's Bass business here, a healthy competition. Jonathan's over all the emerging market stuff, so he's going to compete with himself on it. Okay. Yeah, then I just had a quick follow-up for David. The deal closed in April with ClickSwitch. I totally understand the value prop for the banks and credit unions, but if you could shed any more light on just kind of the size of the business or what it did in the quarter, And then when you do these new deals like for things like click switch or even in the past grow, is that a notably faster time to revenue recognition versus just a big digital banking or lending deal? Thank you. yeah um you could hear from me and absolutely there's a much quicker time to revenue for um a business like click switch and we had given you the some of the guidance when we closed click switch that we thought this was going to be for this year it was going to be mid uh loaded single digits in terms of revenue contribution and lower than mid single digits negative EBITDA for the year. We still believe that's the case. One proof point of success is we've seen a few dozen quick switch opportunities enter the pipeline for our existing digital banking customers. So we're really pleased with the activity that we're seeing right now and the ability to cross sell that solution into our existing base.

Thank you, Terry. Thanks, Terry.

Your next question comes from the line of Sterling

I want to go back to Tom Roderick's question, kind of ask it this way. How should we think about, you know, traditionally we listen for wins, especially tier one wins. Think about, you know, nine to 12 months out for implementation, and that's when you get the revenue contribution, maybe reacceleration in revenue. With the decline in backlog and all the elements you talked about five quarters into the pandemic, how should we think about the potential as we move forward? And within the context, you've only given guidance, you know, limited guidance, but what should we be looking for on our side to indicate when we might see a re-acceleration of the top line? Should it be when backlog starts to grow again, or is there any other indicators we should look for? David Morgan Hey, Sterling, it's David. And what I'd say in answer to that question is, first and foremost, remember, and you stated this, it takes about three to five quarters from bookings to revenue. So that creates a natural revenue air pocket we're just now starting to work through. And as Matt mentioned, we've had five straight quarters of COVID-impacted demand. So the improved bookings environment that we're expecting in the second half, that's really going to benefit our revenue trajectory in 2023. so what you're going to start to see is improved backlog over the course of a period of time not quarter to quarter with the mix of new becoming more and more which we've already stated we're seeing an improvement in that mix in the first half of the year relative to last year and then obviously that starts to manifest itself into into revenue trajectory the end of 22 and more importantly into 23. All right, understood. And then one follow-up, when you talk about the top 30 bank loan origination win, loan origination for some investors is hard to wrap their head around because you've got mortgage loan origination, all these other pieces. You've got different players from the old Ellie Mays to the Encinos. Where does this fit in? So what are the vendors that you've competed against, if you're willing to name them or at least conceptually tell us who you're competing against for that type of business? And how might you be able to extrapolate to some more wins moving forward? Yeah, so Sterling, this was a leasing opportunity. So, this is a leasing division of the bank where they roll out leasing products to their customers. The competition was both internal and external. I don't need to go through the names. They can do it themselves. And so, for us, it's just a matter of, you know, we have a pretty strong leasing book on the cloud lending side internationally. And so for us, it's just an opportunity for us to expand within the financial institution. You know, we also sold ClickSwitch to that same entity at the same time. So it's a way to get your foot in the door and sell more and more of it. And a lot of these financial institutions are in leasing and doing more and more leasing. So it's an opportunity there, but it's a workload we put in front of them from the ability to originate the lease from the borrower all the way to the bank to simplify the process. Makes sense. Thank you. Thanks, Sterling. Thanks.

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

Hi, everyone. Thanks for taking the question. So, Matt, it was kind of an interesting point on what you mentioned on M&A, where a lot of your customers were on the acquiring end. I'm curious, how quickly do they make kind of IT or vendor decisions that post that M&A? Is that something that you'd expect in the second half, or does that get pushed into 2022? I'm just curious how quickly those decisions are made as we think about kind of the revenue and backlog of that. Yeah, Brian, thanks for the question. It was something we've never really gotten into. If we looked at the data, 22 acquisitions, and we were the buyer on 21. Total customer base, it was a little bit more than 50, and we were the buyer on all but three. And as you work into different products, it may have a different impact. But the thing that the top line on that or the headline on that is our customers, our strategic customers thinking about growth, you know, of our top of our tier one customers, 20 of them have grown into, into becoming tier ones through acquisitions. And so this is a pattern that we think we're going to see continue to happen. So as far as when, when you see that hit the, the, the, Revenue line for us, it's really tricky because you have regulatory approval you've got to go through. Some banks want to do it as soon as it gets approved. They want to do the conversion. Some banks want to sit and wait and figure out how to put these together. The larger they are, the longer they take to consolidate these systems. But I think the point is this is just a tailwind for us that creates more opportunity within the base to go across some more products and expand. And I think your time to revenue is probably going to look at anywhere between 12 to 18 months from the announcement of it. If it's a really small one, obviously it won't have that big of an impact. It'll happen a little faster. But a really interesting stat that we found, and I don't know that there's many other vendors that could tout those numbers. And Brian, the only thing I'd add is, you know, it also gives us an opportunity to sit down with the customer and extend the existing contractual duration one. And then two, there's opportunities as well across sell at that point. Exactly. Exactly. That's kind of what I was getting to there. So that's great to hear. But maybe a follow-up for me, Matt. I know you gave a lot of comments. on the second half and some optimism there. I'm curious, you know, the third quarter typically isn't as big of a bookings period as the fourth quarter. You know, COVID seasonality kind of gets thrown out the window, right? But, you know, any clarity on what you're expecting kind of third quarter versus fourth quarter? You know, understanding that we're still trying to figure this all out here. Yeah, I mean, that's... Typically true. I would anticipate a bigger fourth than third quarter, but I feel good about where things are in the third quarter. I think you'll see, you know, on the digital banking side, I think you'll see more deals going down. I would anticipate more activity in the tier one side of things. And we could get one or two of those by the end of the year. So there's a lot of good activity there. We're going to continue the path of seven years of doing this and under promise and over deliver on those. But I feel very good about the pipeline, where we are in deals, both in tier one, tier two, and even some tier three stuff. And then on the lending and the bass side of the business, there's a lot of interesting things happening there as well. So your point around the third quarter is a little tricky. I think it's probably the biggest vacation summer in the history of summers, or at least in my lifetime, that somebody's gone when you're trying to get a deal done. But ultimately, I think they're all going to return here in the coming weeks, and we'll start to get some of these deals wrapped up. But I feel good about our – pipeline and the activity and then where we are in the decision-making cycles. And I think you're going to see a strong back half of this year from us. Good to hear. Thanks, Matt. Thanks, Brian. Thanks.

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

Thank you, and good morning. uh we just follow up i know we beat around this quite a bit but what is as you look into 2022 with your backlog uh you know the trend in your backlog currently and i think you're suggesting we'll see different numbers by the end of the year uh how confident are you in attaining your organic growth targets in uh 2022 on on the top line if you would and and uh which products are adding most to that? Is it BAS, is it Precision Lender, Cloud Lending, or is it going to be just the pure digital banking piece?

Yeah, hey, Bob, it's David. And just to sort of add a little bit more color to my earlier comment about that, you know, we are really looking forward to seeing the second half trajectory. But, you know, we have to keep in mind that the time to delivery is an important variable to factor in. And the long-term growth trajectory framework that we put in place, we still believe in that long-term growth framework, but that's over a period of time. And when you have air pockets like this, you can see a period of three, or in this case, three to five quarters, where you do have some compressed growth. But what you end up seeing is a reacceleration from that once you work through that air pocket. So as you know, we're not giving guidance at this point in time for 22, but we do think it's important to make sure you understand the flow of revenue from bookings and the fact that we're just now seeing a reacceleration coming out of the COVID impacted quarters. So as you're thinking about how this trends over the next couple of years, those are going to be important variables to factor in.

Okay. Thank you. And then just on the gross margin, again, the BAS, the transaction revenue, the interchange, are you recognizing that gross or net? I mean, if it's gross, I guess that would pressure gross margin. If it's net, it would be accretive.

It's gross, Bob, and that's why we called it out in the prepared remarks in regards to gross margin, because it did have an impact on some gross margin compression. Again, it's a good thing overall because it shows that these programs are launching effectively, cards are getting out in the hands of the end users, and eventually they're going to transact on those cards. But it does have a short-term impact.

And then just lastly, on Precision Lender, if you could give any update there and how that's progressing, and not only in the U.S., but I think Europe internationally is a huge opportunity. But any changes or any commentary around how Precision Lender is doing?

Yeah, no, they had a really good quarter considering they did the two tier one wins in the quarter. I like the pipeline. They continue to be very active. The existing customers, there's growth in the cross-sell side of things. You know, I would anticipate us... Having a little more consistency quarter after quarter after 2020 in North America on PL, the pipeline looks good. Europe is still lagging. Maybe we get one in in the back half of the year, and Asia is as well. So those places are just behind where we are in North America. but very optimistic about the PL pipeline and the activity that we're seeing. And also it's beginning to become part of net new deals that we're signing as well as part of the cross-sell motions that we're putting out there. So very pleased with it. The team's doing a great job, and it's such a differentiated product that I think you're just going to continue to see growth in that business. Thank you. Appreciate it. Thanks, Bob. Thank you.

Your next question comes from the line of Andrew Smith with Citi.

Hey, Matt, David, Josh. I hope you guys are doing well. Thank you for taking my questions.

I was hoping you could elaborate a little bit on the impact of gross margin. Talk a little bit about the investments you're making there, the technology infrastructure, the delivery teams, a little more color on the investments on that line would be helpful.

Thanks. Andrew, good to hear from you. Yeah, so there's a few pockets of investments there. One is invest to grow. Obviously, that's investing in the technology stack and the capabilities. A lot of focus on the data solutions that we have, which is what our customers are asking for. A lot of focus on the customer experience. But what we're doing is also investing the scale. And what I mean by that is finding ways that we can invest to have long-term benefits to our overall margin profile. As an example, we're investing in ways to have continuous automated delivery. And what that means essentially is we're going to be able to upgrade customers in a much more seamless fashion, reducing the workload by north of 50%. So it does require some short-term investments, and we're seeing that right now flowing through the P&L. But as we start to get into next year and the following years, we feel we're going to scale much more effectively in regards to things like delivery, and you start to see the benefits of these investments at that point in time. Got it. Very helpful. And then on the cloud lending side, good to see the big win. a marquee win should help from a pipeline perspective.

But has anything changed there from a go-to-market perspective, from a product capability perspective, or simply function of just getting the marquee clients and continue to build the pipe?

We continue to enhance the product. We're doing a lot of integration into the digital banking platform. You think about treasury onboarding that is resonating with our prospects and customers. How do you make it easier for a corporate customer to move from a competing bank to your bank or credit union to your credit union? It's highly differentiated. Other people don't have it where it integrates the digital banking solution tied in with precision lender. It makes for a very compelling offering. So we're continuing to build out asset classes, feature functions, and making sure that it's tying together with our entire suite that manages both sides of the balance sheet for the bank or credit union. So just continue to invest in it. We're taking customers live. We had a couple of really nice go-lives in the quarter. on the cloud lending solution for commercial or small business and commercial functionality. So just continue to make progress one step at a time and really happy with the team and the progress they're making there. Well, that's great to hear. Thanks a lot, guys. Appreciate the comment. Thank you.

Your next question comes from the line of Matt VanVleeg with BTIG.

Hey, good morning, guys. Thanks for taking the question. I wanted to ask about the Bass business. It sounds like there's been a little bit of an expansion in terms of what the end user is after. Obviously, the NYDIG announcement was interesting on the Bitcoin side, but curious in terms of how wide of a net you're sort of casting on that opportunity. What kind of maybe less banking-focused types of fintechs are getting involved and wanting to at least add some services on the banking side? And then in addition to that, on some of these neobanks, are you having the lending conversations with them as they try to get into a more full suite of solutions?

Yeah, thanks, Matt. You know, for us, last year I think we pointed out that we were, you know, we had an environment where the smaller fintechs that are starting up and a little maybe just trying to get their sea legs, we have them going into our sandbox, and it's a very lightweight piece. So we're still doing those deals, but we're not – focused on that as much those are inbound for us as much as tier ones and then others that are you know blue chip companies that may not be in um may not be a bank it may be an embedded finance place so you can look at hr payroll retailers of all different sorts that we're talking with on the tier one side so whether it's brands or tier one fintechs you know there's a lot of activity out there we have a very unique value prop to these we have a a credible group of references that are large brands that we can use to talk about the products as well as our banking network. So we have really expanded our net to cover more than just banks, fintechs, and neobanks, but we're also chasing some of these tier one players, like I said, that I think could have some really interesting implications for us in 22 and beyond. If you think about Some of the ones we've referenced, their amount of retail customers, the amount of customers that they have, and their marketing and acquisition engines are just incredible. So it's been obviously a growth area for us, but the opportunity to expand in the space and our unique value prop is very differentiated, and we're seeing a lot of good momentum there.

Great. And then on the Centrix side, curious if you could give us some kind of update in terms of the total penetration in your customer base that are using a number of these solutions. Obviously, phishing attempts and other cybercrime is certainly on the rise, unfortunately. But just curious on how much of an attach rate you have there and how frequently that's coming up in conversations as you go to these renewals and upsell, cross-sell opportunities.

I just want to make sure you said Centrix? Yeah. Yeah, yeah. So Centrix, I don't know the exact attach rate. I would think we have a couple hundred. We've partnered with those guys since we started before we even acquired them. So I think we'd have a couple hundred. But also keep in mind that our risk and fraud data analytics product in 2008 and 2009 that we rolled out that began looking at commercial transactions to see who you're paying, when you're paying, how often you're paying, and the amount It's a risk and fraud tool that we continue to use, enhance, and protects our customers. So all of our risk and fraud technology, whether it's Centrix or whether it's our machine learning stuff, it's one of the top three or four cross-sells every quarter for us. And with 2020, as people move more digitally, you saw more fraud, unfortunately, occur. And so it's just a staple for us in our sales process, and it's just a rock-solid product that we continue enhancing. The team up in Lincoln just does an incredible job with it. So it's obviously – it's always been important, but even more as more people come online and use the product. All right. Thanks for taking the question. Yeah, thank you.

Your next question comes from the line of James Fawcett with Morgan Stanley.

Hey, this is Jonathan on for James. Thanks for taking the question. Appreciate the optimism around the sales environment.

Barring anything Delta variant related, how are you thinking about potential customer churn as the sales environment improves? Customer churn? Yes. I think with the... As far as a logo perspective, from a retention perspective, what we did last year, renewing a third of our customers, plus our NPS scores are as high as they've been in a while. We've just really doubled down on diving in with our customers and solving problems, thinking about how we can strategize together. We had five Tier 1 visits three CEOs in this quarter, in the second quarter, that came to see us and talk about strategy and direction. So I feel good about our churn number as far as the revenue churn number. It should be in line 5% or 6% like it typically is. And keep in mind, some of that's M&A, some of that's product churn. And so I feel very good about where we are and excited about the pickup that we anticipate seeing in the back half of this year.

Helpful caller. And Last one on M&A. Can you walk us through your approach, M&A, going forward? How are you thinking about valuations in the current environment? And do you think there are still opportunities to be opportunistic for capital allocation?

Absolutely. Yeah, we look at a lot of deals that are out there. Valuations are high right now. It just depends on what the product and the opportunity is. If we look at plugging it into our model, whether it's for lending, whether it's for digital banking, whether it's for commercial functionality, for data, for retail functionality, all those are opportunities for us, including opportunities maybe on the BAS side. And so as we continue to think about having the customer base that we have, what In the M&A environment that we're seeing, our customers doing the M&A and how we're on the winning side of that so much, the opportunity to go expand within our customers and to build a product set out, whether it's for the deposit side of the house, the lending side of the house, are all interesting for us. And the ability to go and cross some more into the base is a huge opportunity for us. So we're evaluating them. We'll be judicious in that. We'll be thoughtful in the deals that we do. But there's nothing to report right now on M&A, but we are active and looking at things that are out there that could add value to the business or our customers.

Thanks for the call.

Thanks, Jonathan. I think that's all the questions. So thank you, everybody. I hope you have a great day. We look forward to seeing and talking to people during the quarter at the investor conferences.

Ladies and gentlemen, that does conclude today's conference call. We thank you for participating. You may now disconnect.