Q2 Holdings, Inc.

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. Please press star one if you have a question at that time. I would now like to turn the call over to Mr. Josh Yankovitch, Investor Relations. Sir, please begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our third quarter 2024 conference call. With me on the call today are Matt Flake, our CEO, Jonathan Price, our prospective CFO, and Kirk 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 with Form 10Q for the third 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 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-GAP basis. The discussion of why we use non-GAP financial measures and a reconciliation of the non-GAP measures to the most comparable GAP measures is included in our press release, which may be found on the Investor Relations section of our website and in our Form 8K file today with the SEC. We have also published additional materials related to today's results on our Investor Relations website. 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 it over to Jonathan to discuss our financial results and guidance in more detail. In the third quarter, we generated strong financial results coming in above the high end of our guidance. We generated non-GAP revenue of $175 million, up 13% year over year. We saw a continued strength in subscription revenue, which was up 18% year over year. And we had another quarter of solid improvement on profitability with adjusted EBITDA of $32.6 million, or 19% of revenue, and free cash flow of $35.1 million. In the third quarter, we met our previously disclosed goal of achieving Rule of 30 on a total revenue basis by late 2024. In addition to our strong financial performance, we saw broad-based booking success in the quarter, highlighted by a total of six enterprise and tier one deals, three of which were enterprise wins with top 50 U.S. banks, as well as significant bookings contribution from the tier two space. Our sales activity spanned across the portfolio with a variety of digital banking, relationship pricing, and helix wins, which we executed through a mix of net new and expansion deals. On the digital banking side, our bookings were driven by a combination of our ability to differentiate our offerings by the quality of the retail and commercial experiences and the breadth, scalability, and versatility of our platform, allowing us to serve financial institutions at various stages of their digital transformation, whether they're evaluating standalone solutions or a comprehensive single platform offering. We had several examples of both scenarios in the quarter. In terms of notable standalone win, an enterprise top 50 bank selected our digital banking platform to service the retail customer base. This customer will leverage key components of our recently announced Q2 Engage portfolio, enabling the bank to drive personalization and differentiation in their consumer banking offerings. We believe deals like this underscore the strength of our products and our ability to win in digital banking with some of the largest financial institutions in the industry. And in one of our single platform wins, we landed a substantial deal with a tier two bank that adopted our entire platform for their retail, small business, and commercial segments. This particular win was our largest digital banking deal in the quarter from an ARR perspective, showcasing our continued ability to drive meaningful bookings impact with financial institutions of all sizes. We've also mentioned how Q2 has frequently benefited when financial institutions complete M&A transactions. And this dynamic continued to play out in the third quarter, marking the second quarter in a row where we gained a tier one customer through M&A activity. In this case, a prospective customer acquired a smaller bank, which happened to be an existing Q2 customer, and selected Q2 as the digital banking provider for the newly combined entity. This acquisition resulted in the addition of a tier one bank that will use Q2's full digital banking platform to serve their retail, small business, and commercial customers. We believe this win speaks to the strength and attractiveness of our platform, as the digital banking technology of the smaller institution proved to be the preferred solution. We also believe this customer will remain acquisitive moving forward. So we're excited about our potential to grow the relationship over time. We continue to see meaningful net new activity on the relationship pricing side as well, where financial institutions of all sizes are looking to drive profitability of their commercial business. In fact, our largest ARR deal in the quarter came from an enterprise win with a $90 billion bank that purchased our relationship pricing products, ultimately replacing a competing provider and their internal tools with Q2. The ability to optimize pricing strategies for both deposit attraction and relationship profitability with our solutions proved to be a key differentiator in this win. We're pleased with the continued momentum we're seeing in the enterprise space on this side of the business. As the deal I just mentioned is also one of our top five largest relationship pricing deals of all time based on contractual ARR at the time of booking. Wins like this underpin not only the strength and sophistication of our relationship pricing platform, but also the viability of our technology for even the most complex enterprise financial institutions as they increasingly view their relationship profitability as a strategic priority. We're also well positioned to continue capitalizing on expansion opportunities with our existing customers. As we've mentioned throughout the year, we believe our customer base gives us significant opportunity for expansion over time. And our performance in the third quarter illustrated this with balanced expansion activity across our customer base, including notable expansion with tier one and enterprise customers that added products like our risk and fraud management solutions. We had our strongest quarter this year for cross sales bookings. Q2 Innovation Studio is playing a larger role in driving expansion activity as well. Some of our top cross sold products in the quarter were generated from our partner ecosystem, showcasing its influence not only in generating bookings, but also in driving deeper engagement with our customers. This momentum is also reflected in our Innovation Studio bookings overall. While the base is still small, bookings from the first three quarters of 2024 have already more than doubled the total bookings achieved in all of 2023. Additionally, the majority of our net new wins in digital banking once again cited Innovation Studio as a key reason for choosing Q2, underscoring its importance in both customer acquisition and expansion. We believe these trends demonstrate the growing value that our customers see in our breadth of products while validating our land and expand strategy. Moving forward, our opportunity for expansion coupled with the value of these bookings reinforces our belief in the longer term revenue potential within our existing customer base. We also saw meaningful activity with Helix in the quarter, highlighted by a major renewal and expansion with one of our top five largest Helix customers and our first Fabric win. This significant win was with Invisint, a credit union services organization that will utilize Fabric to optimize and grow their prepaid card offering across the credit union customer base. As a front to back retail tech stack supported by our modern Helix core, digital banking front end, and expansive partner ecosystem, Fabric allows our customers to pursue their unique growth objectives by helping them easily launch a variety of fee generating and deposit gathering services, both of which are top of mind across the industry. And while the Invisint partnership is just one example of what customers can do with Fabric, we believe opportunities like this highlight its versatility in helping a broad range of customers facilitate their own use cases to diversify their strategies and differentiate themselves. Overall, our third quarter sales performance demonstrates our sustained ability to capture the market opportunity in front of us. Demand remains strong and we executed against our profitable growth strategy while obtaining our rule of 30 target in the quarter. Before handing it off to Jonathan to discuss our financials, I'd like to take a moment to thank David for his time at Q2 as chief financial officer. We're grateful for the many contributions he's made to the company over the past four years and I appreciate his dedication to ensuring a smooth transition. And now, Jonathan will step into the role of chief financial officer. Jonathan has extensive experience in corporate finance and investment banking, deep knowledge of the FinTech space, and has spent nearly seven years at Q2 working closely with and his teams while leading key areas of the company including corporate strategy and emerging businesses. We're excited to welcome him into the CFO position. With that, I'll hand it over to Jonathan to discuss our financial results in more detail.

Thanks, Matt. I would first like to thank David and echo Matt's appreciation for his many contributions to Q2 over the past four years. He's instrumental in ensuring a smooth transition and we're grateful for the long-term value he's brought to Q2. I'm excited to step into this role as the CFO and build on the great work David and his teams have done as we continue to execute against our profitable growth strategy. With that, let's turn to our financial results for the quarter. We're pleased with our performance across several key metrics including the achievement in the quarter of our previously discussed rule of 30 target. This milestone along with both revenue and adjusted EBITDA surpassing the high end of our guidance underscores the strength of our business model and solid execution. We've seen robust growth in our subscription-based bookings which is reflected in our ARR growth. Notably, our subscription revenue in the third quarter accounted for over 80 percent of our total revenue, highlighting the success of our ongoing strategic shift towards higher margin recurring revenue streams. Furthermore, we've made substantial progress in our free cash flow generation which has seen a meaningful -over-year increase. We believe this improvement in cash flow coupled with our strong revenue growth and expanding margins positions us well to continue executing against our three-year target financial framework. I will now discuss our financial results in more detail and conclude with our updated guidance for the fourth quarter and full year 2024. Revenue for the third quarter was 175 million dollars, an increase of 13 percent -over-year and up 1 percent sequentially. Our total revenue growth was driven primarily from subscription-based revenues which grew 18 percent -over-year and 3 percent sequentially. As I mentioned earlier, subscription revenue comprised over 80 percent of our total revenue, highlighting the ongoing shift in our revenue mix towards our highest margin revenue stream. The -over-year and sequential growth was primarily driven by a combination of new customer goal lives and expansion with existing customers. As a recurring theme we've discussed throughout 2024, revenue from expansion sales including cross-sale solutions and improved contractual terms typically materializes more rapidly than that from net new wins. This dynamic has been a key factor in our subscription revenue outperformance throughout 2024. Our services and other revenues declined by 11 percent -over-year. As we have mentioned previously, this trend is primarily driven by the reduction in our professional service revenues which are more discretionary in nature. Given the persistent pattern we've seen throughout the past several quarters, including an average -over-year decline of roughly 12 percent in 2024 and our strategic focus on higher margin growth opportunities, we anticipate these headwinds in our services segment to persist into the foreseeable future. Total annualized recurring revenue or total ARR grew to 796 million dollars, up 15 percent -over-year, from 694 million dollars at the end of the third quarter of 2023. Our subscription ARR grew to 655 million dollars, up 20 percent -over-year, from 547 million dollars in the prior year period. Our -over-year subscription ARR growth was driven primarily from net new customer wins as well as expansion bookings with existing customers. Looking ahead at the fourth quarter, we expect that our subscription ARR growth rate will moderate to somewhere between 12 percent to 14 percent -over-year as we compare against the fourth quarter of 2023, which was our strongest bookings quarter in company history. Our total ARR growth continued to be negatively impacted by the decline in professional services-based revenue we previously discussed. Our ending backlog of over 2 billion dollars increased by 78 million sequentially or 4 percent and a record 467 million dollars -over-year, representing 30 percent growth. The -over-year and sequential increases were primarily driven by expansion-based bookings including renewals and additional solutions added by existing customers as well as net new customer wins. In addition, the sequential growth benefited from our best cross-sale quarter of the year as well as continued strength and renewals. As we have mentioned previously, the sequential change in backlog may fluctuate quarter to quarter based on the number of renewal opportunities available within that quarter. Gross margins were 56 percent for the third quarter, up from 53.9 percent in the prior year period and from 55.7 percent in the previous quarter. The -over-year increase in gross margin was driven by an increasing mix of higher margins subscription-based revenues and increased efficiencies within our delivery and support functions. Total operating expenses for the third quarter were 73 million dollars or 41.5 percent of revenue compared to 71 million dollars or 45.8 percent of revenue in the third quarter of 2023 and 74 million dollars or 42.7 percent of revenue in the previous quarter. The -over-year and sequential decline in expenses as a percent of revenue came primarily from improved scaling of sales and marketing expenses relative to revenue. As a reminder, the sequential decline in sales and marketing expense was primarily a result of our annual client conference, Connect, which impacted sales and marketing expenses in the prior quarter by approximately 1.5 million dollars. We also saw a -over-year reduction in expenses as a percent of revenue within both research and development and G&A, demonstrating our continued focus on operational efficiency and our ability to scale while maintaining our commitment to delivering -in-class innovation to our customers. Total adjusted EBITDA was 32.6 million dollars, up 66 percent from 19.7 million dollars in the prior year period and up 9 percent from 29.9 million dollars in the previous quarter. We generated cash flow from operations in the third quarter of 43 million dollars, driven by improved profitability and continued effective working capital management. For the quarter, we also generated free cash flow of 35 million dollars, resulting in free cash flow -to-date of 70 million dollars, which is up meaningfully -over-year from the 10 million dollars generated through the first nine months of the quarter. We also generated cash flow from 2023. We now expect our free cash flow as a percentage of adjusted EBITDA for the full year to be over 70 percent for the full year of 2024, significantly exceeding our initial expectations heading into the year. Let me wrap up by sharing our fourth quarter and full year 2024 guidance. We forecast fourth quarter non-GAAP revenue in the range of 178.1 million dollars to 181.1 million dollars, resulting in full year non-GAAP revenue in the range of 691.5 million dollars to 694.5 million dollars, representing -over-year growth of 11 percent for the full year. As we approach the end of 2024, we expect our full year subscription revenue growth to reach approximately 16 percent -over-year, significantly outpacing our initial projection of 13 percent for 2024 that we made a year ago. This substantial full year outperformance reflects the consistent strength of our expansion-based bookings and successful new customer goal lives throughout 2024. This acceleration in full year subscription revenue growth reinforces our confidence in our three-year annual average subscription revenue growth target of 14 percent. And looking ahead to 2025, we continue to anticipate full year subscription revenue growth to be approximately 15 percent. We forecast fourth quarter adjusted EBITDA of 34.3 million dollars to 36.3 million dollars, and full year 2024 adjusted EBITDA of 122 million dollars to 124 million dollars, representing approximately 18 percent of non-GAAP revenue for the year. In conclusion, our strong third quarter results and updated full year guidance showcase the durability of our business model and our solid execution, highlighted by achieving the total revenue rule of 30 target we shared at the beginning of 2023. Our performance, marked by subscription revenue growth exceeding expectations, enhanced operational efficiency, and accelerating cash flow conversion demonstrate significant progress towards our three-year financial targets. We remain dedicated to delivering growth, profitability expansion, and improved capital efficiency, and believe that our results to date collectively illustrate our progress and potential as we continue to evolve our business and drive shareholder value. With that, I'll turn the call back over to Matt for his closing remarks.

Thanks, Jonathan. In closing, we rounded out a great third quarter with strong financial performance and solid sales execution across the business. On the sales front, we saw a broad mix of booking success with tier one and tier two customers highlighted by multiple enterprise wins with top 50 U.S. banks. We continued to land a combination of net new and expansion deals within digital banking, relationship pricing, and helix, including our first fabric win and one of our top five largest relationship pricing deals of all time. We believe our sales performance in the quarter reinforces our competitive differentiation and our ability to capitalize on a range of opportunities across our lines of business. On the financial side, our results exceeded the high end of our guidance and we continued to deliver improved profitability in accordance with our long-term financial targets, enabling us to achieve our rule of 30 target in the third quarter. As we begin to close out 2024 and look ahead to 2025, we're confident that we'll continue to drive shareholder value with our strong product portfolio, solid sales execution in terms of both net new and expansion opportunities, and our proven ability to execute against our profitable growth strategy. Thank you, and with that, I'll hand it over to the operator for questions.

Thank you, sir. And once again, everyone, it is star one, if you would like to ask a question today. We'll go first to Jan Perlin, RBC Capital Markets.

Thanks. Good evening, everyone. Great quarter. I wanted to just dive in a little bit, if we could. You know, your subscription AR and backlog here again accelerated year over year, you know, when we look at kind of on a sequential basis. So maybe, Matt, if you could just, can you touch on this a little bit, but maybe like dive into maybe how some of these deals are evolving a little bit, you're clearly winning, you know, bigger banks and financial institutions, but it also feels like the types of deals that you're signing are a little bit more holistic within your product portfolio. So if you wouldn't mind just maybe revisiting that with a little more detail, that'd be great.

Yeah, Dan, we continue to be pleased with the demand environment out there. Deposits are critical for everybody, and our system drives retention, acquisition, and growth of those deposits. And then our relationship pricing product, it's not a rate sensitive product, but it's a much more complex environment to price relationships. And so you're seeing the $90 billion bank we signed with it. I would say that upmarket on the enterprise and tier one deals, you know, they get one product in and they continue to expand with more products down the tier one customers. And more than 50% of them only have one major product skew. So we have a lot of opportunity to expand within that 100. Then we have 230 customers that are greater than 5 billion that are not digital banking. And they're obviously, that number is even greater than 50% for them where we can expand. So there's a lot of opportunity there as well. As far as we talked about the mix being different in 24 than it was in 23. As I said here today, at the end of the quarter, we've signed almost twice as many deals in 20 at the same time as last year at this point. So demand environment remains strong. And, you know, we talked about the tier two that bought the whole suite of products. We're seeing that happen in the tier two and tier three space where they do buy a more robust set of products, but really happy with the demand environment. And we think that's up for a nice fourth quarter as well. So just pleased with the execution of the sales team and the ability to close these deals.

Yeah. Yeah. I mean, it sounds like you just continue to gain momentum on momentum. To follow up to that real quick, if I could, you know, as you, as these wins are becoming larger, maybe more holistic deals and just given the sheer size of the backlog now, are there any concerns that like the implementation teams need to be kind of beefed up a little bit? I know you always give the timing of how these things are going to roll in, but we need to start to need to be pretty big numbers. And I just, I often wonder if that doesn't catch companies off guard. So anything there would be great. Thank

you. Yeah, Dan, fair question. And in the history of the 20 years of the business, we have been caught off guard, but our implementation sales and finance organization work very closely on demand and capacity planning. And I don't anticipate any problems like that in 20, in 25.

That's great

to

hear. Thank you.

We'll go next to Chris Kennedy, William Blair.

Great. Good afternoon. Thanks for taking the question. 16% subscription revenue growth this year, at least 15% next year, and then compares to your long-term targets. Any way to think about kind of the trajectory there?

Yeah, Chris, it's Jonathan. I'll take that. So yeah, as we've said on the call, we feel really good about the performance in particular, that 16% relative to the 13% we sort of saw and provided as guidance coming into the year. We've really seen overperformance in particular when it comes to cross sale, when it comes to the renewals that we've seen, both in terms of the economics we're getting on those renewals, but also how we pulled in renewals out of scope from the year, which has helped the performance. And so that's really led to the overachievement that you're seeing in that first year, the 16%. And then as we think about the 15%, sitting here today, obviously we still have a fourth quarter that we're looking at that hopefully will be strong on the cross side too, so have an impact there. And then we'll get more color around what the shape of it from a 26% perspective looks like on the February call. But all in all, sitting here today, feel really good about the dynamic and just got to continue executing at a high level, but very, very pleased with the results today.

Great. Thank you. And then Jonathan, just a quick one for you. Can you just talk about kind of you've been at the company for a long time, but have a new seat, kind of what your key priorities are going forward? Thank you.

Yeah, definitely. So I would say from a philosophical perspective, very much continuing down this path of profitable growth. And we're still early days when it comes to a lot of the execution. I know we've seen a lot of progress in terms of the profitability of the business, but we still feel like we have a long way to go. And we want to do that while we're maintaining an elongated runway of the type of growth profile that you're seeing from us. So really it's around continuing down this path of profitable growth. We're going to invest in areas that help maintain and drive our leadership position in the market. And we've talked a lot about it, but you see in the call today, the cashflow position of this company is strengthening. That leads to a stronger balance sheet. And that's really going to be a priority for us as we continue to strengthen the balance sheet and put the company in a strong position to over time be in a position to strategically act where there's opportunity. And so right now we're just heads down and executing, but very much pleased with the year so far and heading into 25. I think we're going to have a lot of opportunity to continue a lot of the great work that David and his team have done and then continue exploring new opportunities to move the ball forward.

Great. Thanks for taking the questions.

Thanks,

Chris.

And Terry Tillman from Truest Securities is up next.

Great. Thanks for taking the questions. This is Bobby Dion for Terry. So y'all continue to report great success coming in on the winning side of M&A. I'm curious, what are your expectations for the bank M&A environment heading into next year? And how big of a tail end is M&A for growth in a normal or elevated M&A year? And then I'd add one follow up. Thank you.

Yeah, it's hard to predict what's going to happen. I think generally the view is, you're going to see M&A pick up in 25. There's a backlog of deals that are sitting out there. I don't want to get too much into forecasting it, but I do anticipate it picking up after the Trump takes office and you'll potentially see more and more deals happen, which is, as you know, historically for us, we're in about the 90% win rate where we retain the customer and pick up the acquisition. And we had a great story that I mentioned in the prepared remarks around smaller financial institutions got acquired by a bigger one and they adopted our platform. So, you know, not sure what that number could look, whether that's going to be a one off or more common, but the platform is highly differentiated and I think you'll see a pick up as far as the revenue lift. I don't know if you can quantify that. Yeah,

I would just say, you know, we're examining the deals that are out there that are in backlog. The way I think of it, though, is you have a real time lag between when the deal is announced to when it closes to when migration would occur. And then, you know, you have the opportunity for one time services dollars and then depending on the negotiation and the nature of the contract in terms of their user counts, there's opportunity for upside on the subscription side of the equation as well. But there's a lot of factors and every deal is sort of its own snowflake. So hard to predict deals that haven't happened yet.

Great. And then secondly, we've seen various reports on private company vendor challenges in the space. Have those been a driver of pipeline or new booking success in 3Q and how do you see the competitive landscape evolving going forward? Thank you.

Yeah, I mean, you know, we there's plenty of examples of people that struggle to get the product live that try to do different, you know, new entrants and features and functions, especially on the commercial banking side, which are the crown jewels of our customers, the banks, and moving those customers is very risky. Our ability to point out 100 customers, more than 5 billion, we've converted on every core from every system multiple times. Customers are happy. They're referenceable for us. So it's a tough business. The integrations are tough. The customer experience is tough. The conversion stuff, it just takes time to get there. And so we see some cases of some private companies struggling. And then also, some of the larger historical players have a lot of different businesses that they're running right now. They don't wake up every day thinking about how they're going to build an amazing digital experience that can drive deposits and stickiness and a real experience that makes somebody feel the bank's brand as they're interacting with it, which is what's a big part of digital banking is you've got to drive an experience that the bank gets credit for. We do that really well.

Much appreciated. Thank you.

Thank

you.

And next, we'll hear from Alex Sklar, Raymond James.

All right. Thank you, Jonathan or Matt. Just in terms of the subscription bookings commentary, I appreciate the color on flagging the tougher compare. Can you just elaborate a bit more on what you're seeing in the macro or late stage pipeline going to kind of what's normally a stronger quarter? What are some of the puts and takes? Why there might not be some real seasonal strength in Q4? Thanks.

Yeah, I anticipate Q4 being a strong quarter. It's a tough compare when you sign the two biggest deals in the history of the company in Q4 of 23, obviously. And that was a historic quarter. But I anticipate having a strong quarter. We've got to go execute. We've got to win those deals. But I would anticipate it being the biggest quarter of the year for us and feel really good about our ability to execute on those deals.

And I would just add, when you think about, you know, we gave that color because I think it's important for investors and the audience at large to understand that the Q3 number was obviously very strong when you look at sub-ZRR. So sequentially, we wanted to make sure that people understood why the pressure in Q4. And as Matt alluded to, it's more or it's purely a offer comp Q4 of 23 versus Q4 of 24. Feel really good about the fourth quarter trajectory, as Matt said. We've got to go execute. But that 12 to 14% gives some directional guidance around how to think about it relative to Q4 of 23. And then also puts into framing how to think about the sub's growth in 25 that we provided.

Okay, perfect. Thanks for the added color there. Jonathan, maybe it's a follow up for you. The incremental margins have been fantastic this year. Obviously hit rule of 30 earlier than kind of planned. You've talked about the free cash flow conversion being up nicely. Just from your seat today, like where are your big focus areas going forward on the efficiency side of the business to kind of make sure that you are in a position from balancing strengths going into the next couple of years? Thanks.

Yeah, great question. So as I mentioned, I think there's still a lot of work to do on some of the things that we're doing to continue pushing the ball forward on new opportunities. So one of the things I'll call out, as I mentioned in the prepared remarks, we crossed the threshold of 80% subscription mix. And while we've made tremendous progress in that from just looking back a year or two ago, we still think there's more to go there. And so that will certainly be one of the contributors. Maybe not to the degree you've seen over the last two years in terms of the expansion, we still see that mixed shift continuing in through 25 towards subscription, which will have a positive impact on margin. The other thing that we're seeing, as I mentioned on some of these renewals is we're doing a really good job when it comes to pricing and packaging and ensuring that we're getting the value of our platform in these renewals. And so really like new strategies, trying new opportunities when it comes to how we think about pricing and demonstrating the value of platform at the point of renewal. We've talked about efficiency when it comes to delivery, supports, our upgrade process. And then I think David and team have done a great job down the path of some basic sort of OpEx opportunities. When you look at how strong our bad debt numbers are optimizing our facilities, put for footprints, procurement maturation, and we're still early days some of those levers. So a lot more to go. And this is a company wide mindset that we've instilled and we still think there's a lot more to do on that front. So those are some of the initiatives though that I think you were asking about.

Awesome. Great color. Thank you both.

Thank you. Thank you.

The next question comes from Adam Hodgkin, Goldman Sachs.

Great. Thanks for taking the questions. Just curious on the innovation studio side, you said double year over year. What in your view is driving that? Is it just more partners being added? Is it because it's being referenced in almost every new deal, it's more new logos that are bringing on partner products? Are you educating folks more? Just curious what's driving that momentum?

Yeah, that's a great question. I'll take this just given the recency of the transition. The net new side has an impact and we're certainly trying to educate our prospects and suit to be customers earlier so that they can think about adoption sooner and right into the go live. But the traction that you're seeing that was mentioned on the call is primarily driven from existing customers and then doing a better job of promoting these solutions to their customers, where that's the model in the marketplace for example, and candidly just taking up more of these products as the familiarity with the model and the value proposition is becoming more and more clear. So because you're coming off a small base, I don't want to over rotate to the magnitude that we talked about, but it is still very early days in the adoption cycle. And so we think there's still a lot of room for the existing customer base to take on more products and demonstrate the value of those products to their customers, which ultimately is what will drive the value proposition for all the parties involved here. So mostly driven by existing customers is the short answer to your question.

Okay, no, that's super helpful. And then just on the services side, I totally recognize the headwinds there, but is there anything that's either in or out of your control, that you know, bank earnings getting better, is it you hearing certain things from bank decision makers that would suggest they're changing their minds? I'm just curious what might cause that to turn around and maybe what's causing the headwinds despite some of the success we've seen at the banks recently?

I'll let Kurt or Matt comment on the bank environment, what could drive maybe a resurgence in spend over time, even though that's not what we're seeing today to be clear. But I do want to make one thing clear as we think about this in 25 and beyond, as we are optimizing on the profitability side that we've talked about, one of the things that we're really focusing on is ensuring that the economics of these engagements make sense to us going forward. And we have a real opportunity to think about if that business comes back and there's an opportunity to pick it up, what's the right type of business for us? Where do we want to take it on? And what are the right pricing levels to be able to do so? So I do want to caution that even if some of the macro indicators may signal an uptick in spend over the next couple of years, I think our approach is going to be more disciplined in terms of ensuring the pricing and the implied margin profile of this revenue stream looks a little different than what you've seen from us historically. So I'll just add,

this is Kirk, I'll just add that I think on balance our customers are a little bit more optimistic than they were a year ago, and so that's good as they're going into their budget season and finalizing all those things. But that doesn't mean, to Jonathan's point, that there's going to be some huge wave of demand for the services. We're going to certainly manage that from our side as well in terms of what's the right fit for us and the things that we ought to be doing versus some other provider might do instead. So we'll manage that carefully. We think that there's still a good mix as we see some of these newer customers come on. We can anticipate that it might still be choppy for a little while while they're getting into the next year. Okay, really useful. Thank you, Miff. Thanks, Matt. Thanks,

Matt. The next question is Michael Infante Morgan Stanley.

Hey, this is James Fosseton from Michael. I wanted to ask really quickly on one of the CFPB rules that came out, 1033. It would be great to get your perspective on that ruling and the feedback you've heard from your customers. And I guess we're wondering if this could be a driver of incremental attach of some of your centric risk and fraud capabilities.

Yeah, so still a little early in it. I guess the thing that I would say about this is that we have extensive experience in this kind of all the integrations we do, numerous cores, all the legacy technology integrations that we have, the way that we standardize and map accounts, historical transactions, kind of all the real time and scheduled transactions, kind of all the things that are relevant to open banking and kind of what our customer profile looks like. How this kind of gets implemented and integrated across the industry, I think is even though the rule is written now, you know, we still have to see how this is going to play out from a technical perspective and what's actually required by the different institutions. But we feel like we're in a really good spot to be able to help our customers and their customers with that. Certainly, the fraud space is going to be a key ingredient of this because you don't want people to be able to just be moving their accounts around without accountability for making sure that that's being done in a safe and secure way. We do a lot of that for our customers today. There's no reason we wouldn't be doing that in the future. But there's still a lot to be learned about how it's going to get done out there in the field, so to speak.

I appreciate that. And another question just kind of around evolving market conditions and potential demand for product. Wondering if you can provide a bit more detail on your premium treasury pricing solution and its market reception, particularly given the current interest rate environment.

Yeah, we've seen really good take up for premium treasury pricing, including with some of our largest precision lender customers, which is a really positive development. Look, pricing commercial relationships is really difficult and really meaningful. And you can't just, you know, I think everyone's kind of fully on board. You can't just price the loan side correctly. You've got to price the whole relationship. So that we continue to see strong demand for that. We think the conditions will remain strong for that because although funding costs are starting to come down a little bit, a lot of people are repricing their deposits as they're repricing them as the market, as the interest rates come down, right? Getting that exactly right. Making sure you're balancing that with whatever your fee income is, is super important. So I think there's some nice tailwinds there.

That's great to hear. Thanks for that. Thanks, Eddie.

We'll take the next question from Dominic Gabriel, Compass Point.

Hey, great. Nice to meet everybody. And thanks for taking my questions. So I just was curious, I wanted to dive just maybe a tiny bit deeper on the discretionary spend of banks and the flow through into services. Is there any chance that you'd be willing to provide a little more detail on the breakdown or how much of the roughly 11 to 12% year over year decline is within your control of de-emphasizing those products versus the demand piece? Nice to have a follow-up. Thanks so much.

Let me give a little bit of color. We don't disclose the breakdown, but what I'll tell you directionally when you think about the services components, the consulting engagements, consulting-like engagements, what we call premier or integrated services is certainly the largest component of the bucket, but still under 50%. Then you have implementations which more tracks the bookings performance, so more control or more ties specifically to how they spend on digital, and so that will map more to the trajectory of that in terms of the revenue profile. And then we have some other services, one-time engagements, other small dollar services, opportunities that are in that total bucket, as well as our what we call services and other, which would include pass-through on the Helix business. So that's total bucket. And again, that largest bucket still sub 50% is where we're feeling this pressure where we clearly call it discretionary, and we don't really have control over the spend dynamics from a bank perspective.

Okay, perfect. I appreciate that. So it looks like on the marketing side, you're getting quite a few large wins versus the historical set of wins per year, but your marketing expense, you're seeing more efficiency there. Maybe just talk about what your sales force is doing, the tenure of your sales force, why you're seeing these gains that are coming through the numbers while you're still getting larger and larger wins. Thanks so much.

Well, I think to some extent, we made a commitment to get into larger customers about IPO time. It takes a long, 10 years ago, it takes a long time to get there because you've got to win the deal, you got to get them up and running. And as I always say, customers reference up, not down, meaning a prospect wants to talk to a bank or credit union that's larger than them to make sure you can handle the scale and the growth. It takes time to do that. We've been very successful at that. As I mentioned earlier, we have more than 100 tier one customers on digital banking. And so word of mouth spreads, the sales reps, especially in the tier one and above, are all experienced. They know the story, they know how the products work, they're professionals, they have relationships, and they drive those. It just takes time to get those done. And as I said, the commercial offerings have matured significantly. Over the last several years, we invested heavily during the pandemic in our roadmap and our products, whether it's Precision Lender, or our fraud products, or Innovation Studio, or the digital banking platform. So it just takes time to build that customer base that you can reference off of, deliver. And then the expansion opportunity is a huge opportunity for us as well, as I've already mentioned earlier in the call. So it's just a lot of work that goes into it, whether it's the sales team, the solutions consulting team, the engineering team, the delivery organization. So we've just built this organization with a long term view of what we're going to do. And so I hate taking away from the tier two and three, because that's still the bread and butter of this business. We win those deals, they're great. Banks and credit unions, they grow, they go make acquisitions. But to get into the space like we've done, especially over the last two or three years, it's a testament to the quality of the team and the products and the culture we have at

this company.

Thank you.

Thanks, Thomas.

Just a reminder, it is star one if you have a question. And next is Joe Brewer-Beard.

Hi, everyone. This is Peter Karastan for Joe tonight. Thanks for taking our questions. I think at one point in the year, you had said that three Q was a bit lighter on the renewal side compared to the rest of the year. Obviously, a really strong RPO result here. So is it the case where renewals came in stronger than expected? Or should this be read as just a really strong net new and cross all activity this quarter?

Well, the Q3 is typically a slower quarter, because you have the summer and you got people coming back and they start doing planning for the next year and in September, typically. One of the things to think about, it was the largest cross-sell quarter of the year for us, is that we had our client conference about a month later this year. So we did it in June as opposed to May. The client conference generates a lot of energy and excitement around the product roadmap we have and the offerings that we present to them. And so that was in early June. A lot of those decisions just got pushed into the third quarter. I don't want to take anything away from what the team did, but I think that's why you saw having such a big renewal quarter. But I would say that I would anticipate Q4 being a solid renewal quarter as well. So really happy with the performance by the customer success team, what they've gone out and done this whole year. But I'm excited about also what the

quicker time to revenue projects on the cross-sell side benefiting subscription this year. How should we be thinking about this trend as sustainable, particularly going into the next couple of years? Is there anything unique in this year that is maybe higher in this bucket, or do you think this is something that can continue to drive upside going forward?

We're optimistic that we can continue to see strong performance here. I think what is a little bit unique so far that we've seen here to date is a lot of renewals out of scope for the year that have been pulled in to 24. And that's a testament to the team, as Matt said, but also to the client's commitment in wanting to use and expand with the product. So that's been one of the drivers. And then just to strengthen cross relative to plan, we're confident that that can continue into next year. I don't know that we would have projected this level about performance. And I don't plan for that as we think about 25. But from a demand perspective, I think it's a good spot that we're in, as Matt mentioned. When you win all these clients, both small and large, it gives us a huge opportunity to go cross-sell into it. And we're seeing that come to fruition. And we certainly see that in 24, which has driven a lot of the upside in your subs growth that you've seen.

Great. Thank you.

Thanks, Peter.

And we'll go next to Andrew Schmidt, Citi Group.

Hey, Matt. Hey, Jonathan. Good to speak with you. Good results this quarter. Maybe we could dig into the gross margin performance. Apologies, I hopped on a little bit late. But it seems like some good success there. And I know you guys have some tech initiatives that are ongoing to improve delivery and things like that. But maybe just talk about just the drivers in the quarter. And then over the next couple of years, how would you think about gross margin progression with everything you're working on there? Thank you so much.

I would say the quarter sort of manifests itself in the improved sequential and your gross margin for all the reasons we've been talking about, whether it's the mix, as I mentioned, Andrew, we sort of surpassed 80% subs, which obviously is the highest gross margin revenue stream we have in the company. And so that's been a contributor, as you mentioned, to delivery efficiency, support and upgrade processes, things we've put in place over the last year or so sort of coming to fruition with more room to grow there, better utilization of global resources and maturation of that team and the role they're playing. And then, you know, as we've talked about, as you get sort of into 26 and beyond, the opportunity there with things like migration to the cloud and such are areas for ongoing expansion beyond sort of the next 12 to 18 months. So we are pleased with the gross margin improvement we've seen, but still think we have a long way to go. And I think that's implied within our three year framework that we've given as well.

Got it. Thank you so much, Jonathan. And then switch gears to the digital lending business. I saw the Symphonics rollout. You know, I think that's an iteration on cloud lending. Could you just talk about competitiveness there? It sounds like you guys have refreshed that product, can go at it, you know, a little bit more vigor, maybe talk about just the opportunity to drive more digital lending wins across the platform. Thanks so much.

Yeah, I think we learned a lot from the rebrand we did of Helix. When you're playing in different geographies, which Symphonics is and Helix, obviously being a domestic product, and you're serving a different set of clients, meaning primarily non-banks and credit unions, the importance of building that brand and identity, we sort of saw the value of that with the initiative we had in Helix a couple years ago. So that was something we learned from and now applied it to your right, sort of the bulk of the cloud lending business as it used to be known. And so we think of, you know, from a -to-market perspective, continuing down that path, we're not changing the strategy in terms of now going after sort of U.S. financial institutions. We're still focused in the areas where we've been focused on with that business, but it allows the team to sort of be able to go to market with a clear value proposition and identity that they can benefit from and that matches sort of what they're trying to message in the market versus the conflation with the rest of Q2, which wasn't helping them.

Got it. Thank you very much. Gretz, a good result here.

Thanks, Andrew. I appreciate it.

And ladies and gentlemen, that does conclude our question and answer session. It does also conclude our conference for today. We would like to thank you all for your participation. You may now disconnect.