Good morning. My name is Phillis, 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. 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 Mehok, 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 8-K 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 continue 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 are 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 our 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 continue 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 criterion. We also continue 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 solution. 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 for 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 we’ll use our loan pricing solution 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 and 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 BaaS 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 institution 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. 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 continued 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 ClickSWITCH, which we acquired on April 1. 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 BaaS business, which includes interchange as well as pass-through fees for debit transactions. This increase in revenue from the BaaS 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-over-year increase in backlog was largely a 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 solutions, 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 ClickSWITCH. 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 margins. 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 decline in cash was attributable to the acquisition of ClickSWITCH 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 StoneCastle, 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%. 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. In summary, 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, 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.

Your first question comes from the line of Tom Roderick with Stifel.

Matt, I wanted to highlight the current business environment. The numbers look very good; you are exceeding expectations and increasing guidance, which is exciting. However, it seems like you might be conveying some caution, possibly related to short-term decision-making rather than pipeline development. David, I’m trying to connect that to the backlog, which appears to be down sequentially. Can you elaborate on what you're observing regarding new deal activity and decision-making speed compared to what's in the pipeline and the optimism for the second half?

Thank you, Tom. We are being cautious as this is our fifth quarter during the pandemic, which has introduced various challenges. However, we had a solid quarter, particularly with two Tier 1 deals and a smaller Tier 2 deal in digital banking showing notable activity and wins. We're starting to see alignment in decision-making among Tier 1 and Tier 2 clients in digital banking, as well as some progress in lending across North America. After five quarters of adapting to pandemic conditions, it appears that decisions are beginning to align, and we expect the latter half of the year to reflect numbers similar to pre-pandemic levels, which we hope to leverage into 2022. While we remain transparent about the ongoing situation, I have to express some caution regarding the delta variant, as responses may vary by region, making it difficult to predict that variable. Nonetheless, the current activity feels promising, with our demo numbers increasing by 36% from last quarter and RFPs up 14% sequentially and 40% from the fourth quarter of 2020. We're seeing positive movement in our pipeline, and we're well-positioned for many upcoming deals. We also continue to explore expansion opportunities within our existing customer base. Overall, we are cautiously optimistic about moving back to pre-pandemic norms. David?

Yes, 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 renewed about one-third of our customers last year ends. 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 close 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 tracking 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 pressured from a backlog standpoint.

Yes, makes good sense. That’s really helpful. One quick follow-up. So the banking-as-a-service, the BaaS piece it’s hard not to be enthusiastic when you talk about some of these different wins in 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 margin. 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.

Yes, Tom, it’s a good analogy actually with chess because it isn’t checkers; this is going to take longer to play out. But the way that this typically transpires is we win one of these opportunities when 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. 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.

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. Is this kind of like a low-code framework? And just a little bit more about the studio technology and the monetization? And then I had a follow-up for David.

Yes, Terry, thank you for the question. We are really excited about this. This isn’t something we implemented last quarter; we have been working on this for quite some time. In essence, it accomplishes four key objectives for us and our clients. First, it accelerates our speed to market, enabling clients to integrate the technology they desire and get it operational quickly, regardless of whether that’s done by us, them, or a third party. This fosters differentiation and creates unique experiences for their users, whether for business or retail applications, ultimately enhancing their brand. The third benefit is increased engagement, leading to greater product utilization, more logins, and varied activity across applications such as accounting software, payables, or CRM integrations. From a technology perspective, we offer an SDK that is accessible to third parties. Additionally, an interesting aspect is the revenue-sharing model between financial institutions and us. We are shifting from a focus on extracting maximum fees from banks or credit unions to a model where we discuss the revenue we will share from products they sell or revenue they generate. While many in the industry seek to increase average revenue per user by selling more, our discussions now center on how we can help generate revenue, which is particularly crucial in the current interest rate environment where non-interest income attracts CEO attention. We are very excited about this initiative. It's still early, but there’s considerable activity and strong market reception, which has us optimistic.

That sounds great. It sounds like it’s competition to Jonathan’s BaaS business here, a healthy competition.

Yes, Terry. Good to hear from me and absolutely, there’s a much quicker time to revenue for a business like ClickSWITCH. And we had given you some of the guidance when we closed ClickSWITCH that we thought this was going to be for this year, it was going to be low to mid-single digits in terms of revenue contribution and low to mid-single-digit negative EBITDA for the year. We still believe that’s the case. One proof point of success is we’ve seen a few dozen ClickSWITCH 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.

I want to revisit Tom Roderick's question and rephrase it. How should we consider the traditional timeline for wins, especially with Tier 1 wins, where we expect implementation to occur within 9 to 12 months and see revenue contributions potentially accelerate afterward? Given the decrease in backlog and the factors you've mentioned over the last five quarters of the pandemic, how should we assess the potential as we look ahead? You’ve provided limited guidance, so what indicators should we watch for on our end to signal when we might experience a resurgence in top-line revenue? Should we look for growth in backlog, or are there other signs we should be monitoring?

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 3 to 5 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 5 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 ‘23. 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 revenue trajectory, the end of ‘22 and more importantly, into ‘23.

All right. I understand. I have one follow-up question. When you mention the Top-30 bank loan origination win, it’s challenging for some investors to understand loan origination because there are various components, including mortgage loan origination, and different players like Ellie Mae and Encino. How does this fit into that landscape? Can you identify the vendors you’ve competed against, or at least describe the competitive landscape for that type of business? Also, how do you see potential for future wins based on this?

Yes. So Sterling, this was a leasing opportunity. This is a leasing division of the bank where they provide leasing products to their customers. The competition was both internal and external. I won't go through the names; they can handle that themselves. For us, it's about having a strong leasing portfolio on the Cloud Lending side internationally. It's an opportunity for us to expand within the financial institution. We also sold ClickSWITCH to that same entity at the same time, which helps us establish a foothold to sell more. Many of these financial institutions are increasingly involved in leasing, presenting us with an opportunity. We provide a workflow that allows them to originate the lease from the borrower all the way to the bank, simplifying the process.

So Matt, it was kind of an interesting point on what you mentioned on M&A, where a lot of your customers want the acquiring in. I’m curious how quickly do they make kind of IT or vendor decisions 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 impact.

Yes, Brian, thank you for your question. We haven’t fully explored this, but we analyzed data from 22 acquisitions where we were the buyer in 21 of them. Our overall customer base is just over 50, and we were the buyer for all but three of those. As we move into different products, the impact may vary. Importantly, our strategic customers are focusing on growth; 20 of them have advanced to Tier 1 status through acquisitions. We believe this trend will continue. Regarding when this will reflect in our revenue, it’s challenging due to the need for regulatory approval. Some banks prefer to act immediately upon approval, while others take their time to integrate. The larger the acquisition, the longer the consolidation takes. However, this serves as a favorable trend for us, providing more opportunities to cross-sell products and expand. We estimate that revenue generation from these acquisitions could take anywhere between 12 to 18 months after the announcement. Smaller deals may impact us more quickly. Interestingly, we discovered stats that suggest not many vendors could achieve these numbers.

And Brian, the only other thing I’d add is 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 a cross-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, the third quarter typically isn’t as big of a bookings period as the fourth quarter. COVID seasonality kind of gets thrown out the window, right? But any clarity on what you’re expecting kind of third quarter versus fourth quarter, understanding that we’re still trying to figure this all out here.

I generally agree with that assessment. I expect the fourth quarter to be stronger than the third quarter. However, I am confident about our current position in the third quarter. On the digital banking front, I anticipate more deals will occur, particularly in the Tier 1 category, and I hope we can secure one or two by year-end. There's a lot of promising activity ongoing. We plan to maintain our approach of setting modest expectations while exceeding them. The pipeline looks good, and we have ongoing deals in Tier 1, Tier 2, and even some Tier 3 areas. Additionally, there are many interesting developments in the lending and BaaS segments. The third quarter has been a bit challenging due to what seems to be an unprecedented summer vacation period, which complicates deal closures. Nevertheless, I believe that activity will pick up in the coming weeks, and we will finalize some of these deals. Overall, I feel optimistic about our pipeline and the decision-making processes, and I expect a strong second half of the year for us.

I would like to follow up on our previous discussion. As you look into 2022, considering your current backlog and the trends associated with it, you seem to indicate that the numbers will change by the end of the year. How confident are you in achieving your top-line organic growth targets for 2022? Which products are contributing the most to this growth? Is it BaaS, PrecisionLender, Cloud Lending, or primarily the digital banking segment?

Yes, Bob, it’s David. I want to expand a bit on my earlier comment. We are eagerly anticipating the trajectory for the second half of the year, but we need to consider that the time to delivery is a crucial factor. We remain confident in our long-term growth framework, which spans an extended period. During times of slower growth, such as we are experiencing now, it can take about 3 to 5 quarters to see some compression in growth. However, we expect to see a reacceleration once we move past these challenges. While we are not providing guidance for 2022 at this moment, it's essential to understand the revenue flow from bookings and acknowledge that we are beginning to see a reacceleration following the quarters affected by COVID. As you contemplate trends over the next couple of years, these factors will be significant to consider.

Okay. Regarding the gross margin, for the BaaS transaction revenue and interchange, are you reporting those figures as gross or net? If it's gross, that might pressure the gross margin, but if it's net, it would contribute positively.

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. Yes. They had a strong quarter, particularly with two important wins. I appreciate that the pipeline remains active. There is growth in cross-selling with existing customers. I expect more consistency in North America for our PL efforts starting next year. The pipeline in North America appears promising. Europe is still behind, and we may see some progress in the latter half of the year, while Asia is also lagging. These regions are not yet on par with North America, but I’m very optimistic about the PL pipeline and the activities we’re witnessing. This is also becoming a component of new deals we are signing, as well as part of our cross-selling strategy. I'm very satisfied with the team's performance. They are doing an excellent job, and this differentiated product should continue to drive growth in that sector.

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? Is it technology infrastructure? Is it delivery teams? A little more color on the investments on that line would be helpful.

Andrew, good to hear from you. Yes, 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 in 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.

We are actively enhancing the product and integrating it into our digital banking platform. The treasury onboarding process is particularly appealing to our prospects and customers, as it simplifies the transition for corporate clients from competitor banks or credit unions to ours, creating a unique offering. This integration with our digital banking solution, especially when paired with PrecisionLender, results in a very attractive product. We are also expanding asset classes and features to ensure everything aligns with our complete suite that manages both sides of the balance sheet for banks and credit unions. We are committed to this investment and have had successful implementations of our Cloud Lending Solution for commercial and small business functions in the past quarter. We are making steady progress and are pleased with the team's efforts and achievements.

I wanted to ask about the BaaS 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 in 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?

Thank you, Matt. Last year, we noted that smaller fintechs were emerging and trying to establish themselves. We have them participating in our sandbox, which is a light process. While we continue to engage with these deals, our primary focus has shifted; we receive as many inquiries from Tier 1 companies and other established firms outside of traditional banking, including those in embedded finance. This encompasses various sectors such as HR, payroll, and retail, where we are actively engaging with Tier 1 entities. There’s a significant level of activity with both brands and Tier 1 fintechs. Our unique value proposition is appealing, supported by a solid group of large brand references that highlight our products and banking network. We are broadening our reach beyond just banks, fintechs, and neobanks, and are pursuing Tier 1 players that may offer exciting opportunities for us in 2022 and beyond. The retail customer base and the marketing capabilities of some of these companies are remarkable. This segment represents a growth area for us, and our differentiated value proposition is gaining traction, which is encouraging.

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 cyber crime 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. Yes. I don't know the exact attach rate, but I would estimate that we have a couple of hundred. We partnered with Centrix from the very beginning, even before we acquired them. It's also worth noting that our risk and data analytics product, which we launched in 2008 and 2009, has been designed to analyze commercial transactions, including who you are paying, when, how often, and the amounts involved. This tool helps us manage risk and detect fraud, and we continually enhance it to protect our customers. Our risk and fraud technology, whether through Centrix or our machine learning solutions, consistently ranks among our top three or four cross-selling products each quarter. In 2020, as more transactions moved online, we unfortunately saw an increase in fraud, making these solutions essential to our sales process. We are committed to improving this reliable product, and the team in Lincoln does an outstanding job with it. It has always been important, and its significance has only grown as more people come online and utilize our services.

Your next question comes from the line of Jonathan Lee with Morgan Stanley.

This is Jonathan on for James. 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?

That’s more churn.

Yes.

I believe that from a logo retention perspective, our performance last year, which included renewing one-third of our customers, along with our NPS scores being at record highs, shows our commitment to engaging with our customers and addressing their challenges. We conducted five Tier 1 visits and had three CEOs meet with us this quarter to discuss strategy and direction. Therefore, I am optimistic about our churn numbers, which should remain consistent at around 5% or 6%, as has typically been the case. It’s important to note that some of this is due to M&A and product churn. Overall, I feel very positive about our current standing and am looking forward to the growth we expect to see in the latter half of this year.

Helpful color. 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 with capital allocation?

Absolutely. Yes. 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 BaaS side. And so as we continue to think about having the customer base that we have, 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 or the lending side of the house are all interesting for us, and then the ability to go and cross-sell 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 in looking at things that are out there that could add value to the business of our customers. I think that’s all the questions. So thank you, everybody. Hope you have a great day. We look forward to seeing and talking to people during the quarter at the investor conferences.

Thanks, everyone.

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