Q2 Holdings, Inc.

Good morning. My name is Misty, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holding Third 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. To ask a question during this session, you will need to press star 1 on your telephone. Thank you. I would now like to turn the call over to Josh Yankovich, Investor Relations.

Thank you, Operator. Good morning, everyone, and thank you for joining us for our third quarter 2021 conference call. With me on the call today is Matt Flake, our CEO, David Mihawk, our CFO, and Jonathan Price, our Executive Vice President of Emerging Businesses, Corporate, and Business Development. A quick reminder that we will be hosting our Virtual Investor Day on December 14, 2021. Registration is now open, and there will be a live webcast and replay available on the Investor Relations section of our website following the event. This call contains forward-looking statements that are subject to significant risks and uncertainties, including statements regarding our expectations for 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 FCC, 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 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 in our 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 third quarter results and highlights from across the business. I'll then hand the call over to Jonathan to give you more insights into the emerging businesses organization he oversees. Given the long-term strategic importance of banking as a service and Q2 Innovation Studio, he is joining today's call to provide updates and share his perspective. David will then discuss our financial results in more detail, as well as guidance for the fourth quarter and full year. In the third quarter, we generated non-GAAP revenue of $127.3 million, up 22% year-over-year and 3% sequentially. We also added close to 400,000 users. a year-over-year increase of 12% that brings us to approximately 19.2 million total registered users on our digital banking platform. Throughout the year, I've shared our optimism that the financial services industry would continue to recover from the impacts of the pandemic as the year progressed, leading to gradual improvement in the buying environment in the back half of 2021. And in the third quarter, we saw strong sequential and year-over-year bookings growth that we believe is consistent with our optimism Net new bookings were up 88% compared to the third quarter a year ago, and we had a strong quarter of both renewal and cross-sale activity as well. I've also shared the general sentiment from our customers that in spite of creating short-term uncertainty, complexity, and competing priorities, the pandemic is ultimately serving as a catalyst for them to digitally transform their businesses. Consistent with that sentiment, we have started to see more financial institutions evaluate multiple aspects of our solution set, like digital banking and lending at the same time, as they look to unify their customer experience across the digital channel. We also are observing this digital acceleration with non-traditional providers, as evidenced by several key lending and banking-as-a-service wins with fintechs, brands, and all FIs in the quarter. So with that, I'd like to take some time to discuss a few sales highlights that we believe illustrate this improvement in customers' buying behavior and our favorable position in the marketplace. I'll start with digital banking, where we signed a broad mix of strategic customers, including three new Tier 1 financial institutions. The first was a top 10 credit union that signed for our commercial banking suite. This was a highly competitive deal where our end-to-end commercial solution set was a key driver of their selection. from onboarding to digital banking to risk management. The second tier one win was with a bank that selected us for retail digital banking. The Q2 Innovation Studio played a big role in this win in a scenario where many of our competitors were evaluated. And the third tier one digital banking deal was with a bank that selected our full digital banking platform, including retail, small business, and commercial, while also adding our account opening solution, Q2 Smart, and risk management products. We're pleased to see Tier 1 activity increase on the digital banking side, and I think the fact that we signed standalone retail and commercial deals, along with the full digital banking platform win, speaks to our differentiation in this segment. We had several significant wins in the Tier 2 and 3 spaces as well, both net new and cross-sale. We had a meaningful expansion win with the Tier 2 credit union that purchased our commercial banking suite in 2019 and has now decided to adopt a broad set of retail solutions from us as well, including digital banking, risk management, and account opening. We have more than 450 digital banking customers, many of which start with one aspect of the digital banking platform, like retail or commercial. Wins like these continue to highlight the expansion opportunity we have within our existing customer base. In this example, we also extended the duration of the existing relationship and added substantial incremental revenue. And over the past several quarters, I've discussed the growing trend of financial institutions bundling more and more of our solutions as part of their initial agreement with us, whether it's digital banking, risk management, lending, or retail and commercial onboarding. Highlighting this trend, we signed a Tier 2 bank in what we would consider a full digital transformation win, as they purchased our digital banking and loan origination platforms concurrently, simultaneously running the evaluation, due diligence, and executing an agreement for both solutions. Going deeper into the digital lending activity in the quarter, we continued to sign new deals and expand existing relationships. We are seeing compelling wins with our loan origination solutions. In addition to the digital transformation deal I mentioned earlier, we signed an agricultural lender that will use our solution to modernize their borrower experience and simplify their internal operations. I believe these wins demonstrate the flexibility of our loan origination solution, which enables us to compete for a broad set of digital lending opportunities from traditional financial institutions looking to modernize their lending experiences to alternative finance companies operating within specialty markets. On the loan pricing front, one key win was a large expansion deal with an existing global enterprise client. In this case, the customer had purchased our loan pricing platform several quarters ago. During the third quarter, the bank purchased incremental functionality in order to broaden their use of our solutions, meaningfully growing the revenue associated with this relationship. This is a great example of our ability to expand our footprint with existing digital lending customers. Whether it's cross-selling additional functionality, as was the case here, extending into new business lines or into new geographies supported by the financial institution. So clearly, I'm encouraged by the sales performance from the quarter, and recent acknowledgement from industry analysts has further validated our product portfolio and our vision. We were recognized by IDC for the openness of our technology in partnership with one of our customers, Visions Federal Credit Union. Visions was one of the first customers to adopt the Q2 Innovation Studio, which they've used to substantially accelerate their ability to deliver innovation to their members. And we were recently named a top vendor in ITE Novaraka's Group's Annual Digital Banking and Cash Management Vendor Reports, where they mentioned our expanded view of digital banking to orchestrate the end-to-end experience from acquisition to customer management as unique in the space. recognition like this is important customers look for validation from firms like idc and itay navarro group when they are evaluating new partners and we view being increasingly recognized for the breadth and strength of our portfolio as another driver of the market's belief in our product strategy when you couple that validation with the improving buying buying environment i believe we are well positioned to build on the sales success we saw in the third quarter Thanks. And with that, I'll pass the call to Jonathan to talk more about banking as a service and Q2 Innovation Studio. Thanks, Matt. Over the past several quarters, we've discussed the digital transformation of financial services. And this transformation applies not only to traditional financial institutions looking to refresh their technology, but also to non-traditional players as well, fintech companies and brands that are looking to provide banking services directly to their customers.