Q2 Holdings, Inc.

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. 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 during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. 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 2024 conference call. With me on the call today are Matt Flake, our CEO, David Mihawk, our CFO, Jonathan Price, our Executive Vice President of Strategy and Emerging Businesses, and Kurt 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 day 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 today with the SEC. We have also published additional materials related to today's results on our industrial 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 continued 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 four 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 used Q2 for retail, small business, and commercial. The second tier one win was a retail digital banking deal with a $10 billion bank, demonstrating that our platform remains highly differentiated even in significant retail only opportunities like this. And because of our single platform value proposition, we expect to compete for the commercial business over time. On the expansion side, we had significant wins With two existing Tier 1 customers that started with one component of the platform, either retail or commercial, and purchased the other during the quarter, these deals represent just how valuable our expansion opportunities can be, with one of them more than doubling the expected revenue contribution from that customer. I want to take this opportunity to talk about the unique position Q2 is in for continued expansion with our customers. and why wins like the two I just mentioned are playing an increasingly important role in our bookings performance. Starting with our first line of code 20 years ago, we built a true single platform for retail, small business, and commercial. Today, this approach remains tremendously valuable to our customers for a few reasons. First, it makes our customers more competitive by upgrading them to a best-of-breed solution while unifying the user experience across the customer segments and devices. Because they can add features from across the platform, it lets them grow with their account holders. So if a retail end user now requires business functionality, they can provide it without having to move them to a different system with a different login and experience. It also helps our customers with vendor consolidation, allowing them to operate more efficiently. In moving to a single platform, they can consolidate from multiple systems and vendors down to one and use one set of code to roll out new capabilities. And finally, it helps innovation occur faster, centralizing our customers' data and integrations, making it easier to maintain, to take upgrades, and to add new products and services. Key elements of our product portfolio, such as Q2 Innovation Studio and our artificial intelligence capabilities, are enhanced because we have this unified platform. And for Q2, we believe our single platform drives competitive advantage by improving our ability to land and expand. Due to the various legacy systems that financial institutions often rely on, our customers frequently start with one major product set from us. But once they've converted to Q2, it becomes easier to add product sets through the expansion of our platform. One of our Tier 1 expansions from the quarter is a particularly good example of this. An $8 billion five-bank holding company that originally adopted our commercial digital banking solutions will now add a retail solution to their platform. In addition to the improved user experience associated with the single platform, the customer will also drive operational efficiencies by consolidating from five separate bank instances to serve their retail users into a single instance for both lines of business. And when you pair our platform with the breadth and strength of our customer base, we believe our expansion opportunity only becomes greater. We have approximately 1,400 total customers. And to put our expansion potential into perspective, I'll illustrate the opportunity we have within our Tier 1 customer base alone. We have 90 Tier 1 customers that are using the digital banking platform, and less than half of them are using both retail and commercial solutions. On top of that, we have another 130 Tier 1 customers who are not using our digital banking platform, a portion of our customer base that we believe presents great expansion opportunity as well. So while our net new sales performance has been strong and we're optimistic about our pipeline through the remainder of the year, we anticipate this expansion dynamic to continue playing a key role in our overall bookings performance going forward. Outside of digital banking, our Centrix risk and fraud and relationship pricing teams continue to drive notable sales activity for the business. We had two significant tier one relationship pricing renewals in the quarter. And on the Centrix side, No matter what's happening in the economic environment, fraud remains top of mind for our customers. Our Centrix products, which help them manage risk and compliance, particularly in the commercial banking space, are regularly among our top cross-sold products. And in Q1, we saw over 50% growth in Centrix expansion bookings year over year. So in summarizing the quarter, I'd reiterate the strength of our financial performance, which outpaced our guidance in terms of revenue and profitability. Our continued momentum on the net new side with the demand environment that we believe remains strong as we look at the rest of 2024 and a single platform with a broad, diverse customer base that puts us in a unique position to expand our existing relationships as a complement to our net new sales execution. With that, I'll hand the call over to Jonathan to cover some updates from across our emerging businesses where Q2 Innovation Studio and Helix are also playing a crucial role in deepening our customer relationships.