Q2 Holdings, Inc.

Good afternoon, everyone. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings Third 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. Please press star one if you have a question at that time. I would now like to turn the call over to Mr. Josh Yankovich, 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 10-Q 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-GAAP basis. The 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 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-GAAP revenue of $175 million, up 13% year over year. we saw 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 1 deals, three of which were enterprise wins with top 50 U.S. banks, as well as significant bookings contribution from the Tier 2 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 quarters. In terms of notable standalone win, an enterprise top 50 bank selected our digital banking platform to service their 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 2 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 1 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 1 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 product, 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 expansions with Tier 1 and Enterprise customers that added products like our risk and fraud management solutions, we had our strongest quarter this year for cross-sale 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 ecosystems. 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, inside an innovation studio is 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 Envisant, 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 InVisit 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 attaining 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 David 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.