Good morning. My name is Macey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings Third Quarter 2021 Financial Results Conference Call. I would now like to turn the call over to Josh Yankovich, Investor Relations. Sir, you may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us for our third quarter 2021 conference call. With me on the call today is Matt Flake, our CEO; David Mehok, our CFO; and Jonathan Price, our Executive Vice President of Emerging Businesses, Corporate and Business Development. A quick reminder that we will be hosting our virtual Investor Day on December 14, 2021. Registration is now open, and there will be a live webcast and replay available on the Investor Relations section of our website following the event. This call contains forward-looking statements that are subject to significant risks and uncertainties, including statements regarding our expectations for the future operating and financial performance of Q2 Holdings. Actual results may differ materially from those contemplated by these forward-looking statements. And we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our periodic reports filed with the 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 are 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 third quarter results and highlights from across the business. I'll then hand the call over to Jonathan to give you more insights into the emerging businesses organization he oversees. Given the long-term strategic importance of Banking as a Service and Q2 Innovation Studio, he is joining today's call to provide updates and share his perspective. David will then discuss our financial results in more detail as well as guidance for the fourth quarter and full year. In the third quarter, we generated non-GAAP revenue of $127.3 million, up 22% year-over-year and 3% sequentially. We also added close to 400,000 users, a year-over-year increase of 12%. That brings us to approximately 19.2 million total registered users on our digital banking platform. Throughout the year, I've shared our optimism that the financial services industry would continue to recover from the impacts of the pandemic as the year progressed, leading to gradual improvement in the buying environment in the back half of 2021. And in the third quarter, we saw strong sequential and year-over-year bookings growth that we believe is consistent with our optimism. Net new bookings were up 88% compared to the third quarter a year ago, and we had a strong quarter of both renewal and cross-sell activity as well. I've also shared the general sentiment from our customers that, despite creating short-term uncertainty, complexity, and competing priorities, the pandemic is ultimately serving as a catalyst for them to digitally transform their businesses. Consistent with that sentiment, we have started to see more financial institutions evaluate multiple aspects of our solution set, like digital banking and lending at the same time as they look to unify their customer experience across the digital channel. We also are observing this digital acceleration with nontraditional providers, as evidenced by several key lending and Banking as a Service wins with fintechs, brands, and all FIs in the quarter. So with that, I'd like to take some time to discuss a few sales highlights that we believe illustrate this improvement in customers' buying behavior and our favorable position in the marketplace. I'll start with digital banking, where we signed a broad mix of strategic customers, including three new Tier 1 financial institutions. The first is a top-10 credit union that signed for our commercial banking suite. This was a highly competitive deal where our end-to-end commercial solution set was a key driver of their selection, from onboarding to digital banking to risk management. The second Tier 1 win was with a bank that selected us for retail digital banking. The Q2 Innovation Studio played a big role in this win in a scenario where many of our competitors were evaluated. And the third Tier 1 digital banking deal was with a bank that selected our full digital banking platform, including retail, small business, and commercial, while also adding our account opening solution, Q2 Smart, and risk management products. We're pleased to see Tier 1 activity increase on the digital banking side, and I think the fact that we signed stand-alone retail and commercial deals, along with the full digital banking platform win, speaks to our differentiation in this segment. We had several significant wins in the Tier 2 and 3 spaces as well, both net new and cross-sell. We had a meaningful expansion win with a Tier 2 credit union that purchased our commercial banking suite in 2019 and has now decided to adopt a broad set of retail solutions from us as well, including digital banking, risk management, and account opening. We have more than 450 digital banking customers, many of which start with one aspect of the digital banking platform, like retail or commercial. Wins like these continue to highlight the expansion opportunity we have within our existing customer base. In this example, we also extended the duration of the existing relationship and added substantial incremental revenue. Over the past several quarters, I've discussed the growing trend of financial institutions bundling more and more of our solutions as part of their initial agreement with us, whether it's digital banking, risk management, lending, or retail and commercial onboarding. Highlighting this trend, we signed a Tier 2 bank in what we would consider a full digital transformation win as they purchased our digital banking and loan origination platforms concurrently, simultaneously running the evaluation, due diligence, and executing an agreement for both solutions. Going deeper into the digital lending activity in the quarter, we continued to sign new deals and expand existing relationships. We are seeing compelling wins with our loan origination solution. In addition to the digital transformation deal I mentioned earlier, we signed an agricultural lender that will use our solution to modernize their borrower experience and simplify their internal operations. I believe these wins demonstrate the flexibility of our loan origination solution, which enables us to compete for a broad set of digital lending opportunities from traditional financial institutions looking to modernize their lending experiences to alternative finance companies operating within specialty markets. On the loan pricing front, one key win was a large expansion deal with an existing global enterprise client. In this case, the customer had purchased our loan pricing platform several quarters ago. During the third quarter, the bank purchased incremental functionality in order to broaden their use of our solutions, meaningfully growing the revenue associated with this relationship. This is a great example of our ability to expand our footprint with existing digital lending customers, but it's cross-selling additional functionality as was the case here, extending into new business lines or into new geographies supported by the financial institution. So clearly, I'm encouraged by the sales performance from the quarter, and recent acknowledgment from industry analysts has further validated our product portfolio and our vision. We were recognized by IDC for the openness of our technology in partnership with one of our customers, Vision Federal Credit Union. Vision was one of the first customers to adopt the Q2 Innovation Studio, which they've used to substantially accelerate their ability to deliver innovation to their members. And we were recently named a top vendor in Aite-Novarica Group's Annual Digital Banking and Cash Management Vendor Reports, where they mentioned our expanded view of digital banking to orchestrate the end-to-end experience from acquisition to customer management as unique in the space. Recognition like this is important. Customers look for validation from firms like IDC and Aite-Novarica Group when they are evaluating new partners. And we view being increasingly recognized for the breadth and strength of our portfolio as another driver of the market's belief in our product strategy. When you couple that validation with the improving buying environment, I believe we are well-positioned to build on the sales success we saw in the third quarter. Thanks. And with that, I'll pass the call to Jonathan to talk more about Banking as a Service and Q2 Innovation Studio.

Thanks, Matt. Over the past several quarters, we've discussed the digital transformation of financial services. And this transformation applies not only to traditional financial institutions looking to refresh their technology, but also to nontraditional players as well, fintech companies and brands that are looking to provide banking services directly to their customers. To do so, they have to find ways to partner with financial institutions, both for the regulatory infrastructure and the expertise they provide. Likewise, many financial institutions are beginning to recognize that partnerships with fintechs and best-in-class digital solutions can be a driver of their ability to grow and differentiate in their highly competitive markets. We believe this convergence could play a significant role in helping to shape the financial services space over the years to come. Whether through Banking as a Service, where our technology enables fintechs or brands to partner with financial institutions to launch their own banking products, or Q2 Innovation Studio, which allows financial institutions to easily embed cutting-edge fintech solutions into their own digital offerings. We believe we're in a unique position to facilitate these emerging partnerships and business models. Demonstrating our traction with these solutions, we generated strong momentum with both Banking as a Service and Q2 Innovation Studio during the third quarter. On the BaaS side, we signed multiple net new deals, extended a key existing relationship, and supported a launch event with one of our strategic clients. This client is one of the largest U.S. fintechs and has now launched multiple products, including traditional savings accounts and certificates of deposit powered by our BaaS platform. This is an example of the type of growth opportunity we associate with large BaaS partnerships. As adoption increases among our clients and customers, we have the opportunity over time to earn meaningful incremental revenue to the initial deal. This launch also represents an early entry into business account functionality for our BaaS platform, which will expand our solution set and we believe will represent a competitive advantage for us in the Banking as a Service space over time. Turning to Q2 Innovation Studio, we are beginning to see this program serve as a differentiator for our digital banking platform, both with net new prospects and existing customers. In the third quarter, we signed several new partners to the Innovation Studio ecosystem and added many of our financial institution customers to the program. As Matt mentioned earlier, in Q3, we closed a digital banking opportunity with a Tier 1 customer, which cited our innovation studio as a key reason for selecting Q2. This situation underscores the growing strategic importance of a more open platform in today's market and the differentiation that Q2 Innovation Studio can deliver to both prospects and our existing customers. Our customers are able to leverage Q2 Innovation Studio to accelerate their pace of innovation. It provides them the ability to extend their platform, deliver new functionality, and embed fintech and other third-party products into their digital channels, with launch timelines that can be much faster than traditional delivery models. Combined, we believe Q2 BaaS and Q2 Innovation Studio will add new layers of value to our business, and over time will play a strategic role in expanding our TAM. In order to capitalize on that opportunity, we expect to continue making investments in these areas of the business. By enabling this bidirectional partnership between traditional financial institutions and this emerging ecosystem, we believe Q2 is in a highly differentiated position to facilitate this convergence and help to power the next generation of financial services. And with that, I'll pass it to David.

Thanks, Jonathan, and good morning, everyone. Following a couple of quarters of improved deal-related activity, we're encouraged by the strong bookings performance we saw in Q3. We delivered solid revenue growth that exceeded the high end of our guidance based on delivered revenue as well as organic growth within existing customers as we benefited from increasing adoption of our solutions from customers that see the value and the wide range of solutions we offer. Our ability to continue delivering revenue effectively and finding efficiencies in operations, even as we continue to make important investments in our solutions, resulted in EBITDA, which also exceeded the high end of our guidance. I'll begin by reviewing our results for the third quarter of 2021 in more detail and conclude with updated guidance for the fourth quarter and full year. Total non-GAAP revenue for the third quarter was $127.3 million, an increase of 22% year-over-year and up 3% sequentially. Both the year-over-year and sequential increase in revenue was largely the result of growth in subscription revenue driven by new customer go-lives and organic user growth. In addition, the sequential increase was also due to growth in services revenue associated with implementations as well as Premier services. Transactional revenue represented 14% of total revenue for the quarter, consistent with both the prior year period and previous quarter. Transactional revenue dollars in total declined slightly sequentially, largely from a decline in traditional bill pay revenue for the quarter, partially offset by growth in BaaS-related transactional revenue. Turning to backlog, we ended the quarter with approximately $1.3 billion in total backlog, a 3% increase year-over-year and a sequential increase of $15 million. The year-over-year and sequential increase in backlog was the result of bookings adding through renewal opportunities in addition to the contribution of net new bookings. Gross margin for the third quarter was 51.9%, down from 52.5% in the third quarter of 2020 and consistent with the second quarter of 2021. The year-over-year decline in gross margin was primarily attributable to expenses associated with implementation resources required to deliver and host new customer go-lives as we continue to make investments in implementation resources aligned with the net new booking strength. Total operating expenses in the third quarter were $62.4 million or 49.1% of revenue compared to $50 million or 47.8% of revenue in the third quarter of 2020 and $57.9 million or 46.6% of revenue in the second quarter of 2021. The year-over-year increase in OpEx as a percent of revenue was largely related to R&D as we continue to invest in differentiated innovation. This innovation includes investments we have made in our emerging businesses and our commercial banking and lending offerings that we believe will drive long-term value and growth. In addition, some of the increase in R&D was driven by incremental headcount associated with the acquisition of ClickSWITCH, which were concentrated in R&D. The sequential increase in OpEx as a percent of revenue is largely the result of increases within sales and marketing driven by the first full quarter of expenses associated with Q2 stadium naming rights as well as key demand-generating resources and programs intended to position us for the market opportunity that lies ahead. Adjusted EBITDA was $7.3 million for the quarter, down from $8.1 million in the third quarter of 2020 and $9.9 million in the second quarter of 2021. The year-over-year and sequential decline was largely attributable to a slowdown in revenue growth as a result of fewer go-lives in the quarter, which is a direct result of the pandemic impact on demand in prior periods that we have previously discussed. We ended the quarter with cash, cash equivalents, and investments of $394.6 million, down from $411.3 million at the end of the second quarter of 2021. Cash used in operations was $14.4 million in the third quarter compared to cash flow generated from operations of $11.5 million in the second quarter. The sequential decline was due in part to the final payout of our termination agreement with StoneCastle, totaling approximately $7.6 million. In addition, the timing of payroll resulted in an extra payroll run in the quarter occurring the day prior to quarter close, also totaling approximately $7.6 million. These two items also influenced our free cash flow in the quarter, resulting in a use of $17.7 million. We expect that the normalization of these two items, coupled with a more favorable seasonality of other working capital items, should result in positive cash flow generated from operations in Q4. Now, let me wrap up by sharing our fourth quarter and updated full-year guidance. We forecast fourth quarter non-GAAP revenue in the range of $131.3 million to $132.8 million, representing year-over-year growth of 20% to 21%. As a result, we are increasing our guidance for full-year revenue to $499.8 million to $501.3 million, representing year-over-year growth of 23%. We forecast fourth quarter adjusted EBITDA of $7.3 million to $7.9 million. As a result, we are increasing full-year 2021 adjusted EBITDA guidance to $34.4 million to $35 million, representing 7% of non-GAAP revenue for the year. In summary, we delivered better-than-anticipated results in the third quarter, and we're increasing our full-year guidance for both revenue and adjusted EBITDA. Based on the improving sales performance and customer response to our solutions we have observed as the year has progressed, we're increasingly confident in our ability to continue capitalizing on an improving buying environment in Q4 and into 2022. With that, I'll turn it back over to Matt for some closing remarks.

Thanks, David. Before I hand the call over to the operator for your questions, I want to emphasize that I was pleased with the increase in bookings activity in the quarter. We've been optimistic about having a strong back half of the year, and our bookings execution in the quarter was early evidence that this is materializing. We had a strong quarter of renewal and cross-sell activity and grew net new bookings substantially, both sequentially and year-over-year. We signed a broad mix of net new and expansion deals across our lines of business and market segments, which is a trend we expect to continue. Looking forward, we feel good about the pipeline and the opportunity ahead of us. We have a solution set that matches up with where the market is going, and we are seeing validation among customers and industry analysts alike. With all of this considered, I believe we're extremely well-positioned to capitalize on the widespread digital transformation in financial services that is upon us. With that, thank you for joining today. We look forward to sharing more about our evolving market, strategic vision, and our perspective on the business in our Virtual Investor Day on December 14. I'll now turn it over to the operator for questions.

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

Congratulations on the success in the quarter. Matt, let me start the first one at you. I guess, if we could just go back 90 days, it seems like at the time you offered up some mildly cautious comments on the timing and pace of some of these Tier 1 deals in the pipeline. And I guess, as we sit here today, it's pretty loud and clear, it seems like anyway, that the business momentum has returned, 3 Tier 1 deals, a number of deals around new product solution sets. So I want to ask kind of 2 questions on that. Number one, do I have that right? Is this really kind of the all-clear signal that you're offering us? And if so, can you kind of comment on the momentum in the pipeline as well as the deals that you locked in and the big booking strength that you saw just in the quarter that just passed? And second question around that, if I do have that right, how should we think about how this all ripples through the model? I mean, I know it's too early to kind of issue formal guidance for '22. But I'd love to hear any directional thoughts you might have as to how kind of this renewed momentum plays into the model. And I guess more to the point, when should we all expect to see a little bit of renewed momentum or should I say, acceleration in the top-line as a function of when these bookings kind of ripple through the model in the P&L?

Thanks, Tom. I'll address the first question and then let David discuss the model and bookings. I'm very pleased with the quarter. While I'm uncertain if this indicates a complete turnaround, I believe Q4 appears stronger than Q3. Additionally, Q1 and 2022 are shaping up to be significantly better than the last five quarters. We have numerous opportunities across digital banking, digital lending, Banking as a Service, digital acquisition, data products, and corporate banking, which really set our platform apart. We mentioned in the script that we secured our first transformation deal, where a bank initially focused on digital banking transitioned to digital lending, and we have a few more deals like that in the pipeline that I expect will come to fruition. Those represent opportunities where competition is tough for us. This narrative is gaining traction with our customers. You can expect this momentum to carry into Q4 and hopefully into the first half of 2022. Although I'm hesitant to declare everything is completely clear given the current global situation, I'm very optimistic about our performance this quarter and the efforts of our team. The execution and delivery have been strong, and I'm impressed with the sales organization, particularly in cross-selling, bringing in new Banking as a Service, lending, and digital banking business. I'm looking forward to moving past the challenges of the last five quarters and maintaining the momentum we've built as we enter 2020. David, would you like to elaborate on the model?

Yes, sure. Tom, in regards to how this all plays out in the model, as you can imagine, we're right in the middle of our 2022 planning process, and there are some really important variables that we need to finalize, including our Q4 bookings number and refining our model for our transactional BaaS business. If we were to say where we think the floor is right now for next year, we'd say that's about 15% to 16% growth for next year on the revenue side. But you cast the question in a way that I want to make sure that I elaborate on, which is when do we start to see the momentum that we had in Q3 come back into the model? If you think about how this revenue starts to manifest itself in the model, we think we could see an acceleration of about 300 points, in fact, in excess of 300 basis points in FY 2023 based upon the strength that we saw in Q3 and assuming that we see that momentum continue in Q4 and into 2022.

Super helpful, David. Really quick follow-up for you, just so I have a clear on that. That 15% to 16% floor is really helpful. As you consider some of these newer solutions, Jonathan is talking about BaaS. And if we think about, say, perhaps PrecisionLender, there are certainly some of these where there's perhaps a little bit of a transactional component or a shorter revenue recognition cycle component that goes into it. When you look at the pipeline and how those newer solutions with different revenue recognition policies might sort of impact the model, how are you contemplating the impact of those in that 15% to 16%? Is there really no assumption of those kind of clicking in 2022? Do you have some assumptions? Would love to just thematically here how that might impact the model and how you're thinking about it in that floor you just laid out?

Yes, that’s exactly why I said that was one of the key points that we’re working on right now for our 2022 planning. The more data we have around these BaaS programs in terms of the program launch relative to when we start to see the revenue really kick in from the launch of these programs and the incremental users and the incremental transactions, the more intelligent the model becomes. We want to refine that over the next few months for 2022 planning so that we can give you a more defined answer. So we look forward to having that conversation with you. We’ll certainly talk about 2022 as well as our long-term planning model, which will give you a little more color on 2023 as well.

Your next question comes from the line of Terry Tillman with Truist Securities.

Congrats on the new business bookings uptick. It's great to see and the commentary in 4Q as well. I think the operator said I could ask 1 question. I may have a lot of parts to the question. So just a heads up on that. The first part of my multipart question is on the Innovation Studio, Matt, maybe as we're talking to investors and trying to kind of keep this simple and understandable, what exactly could be a couple of examples where Innovation Studio stood out in that one Tier 1 transaction? I know the idea of open banking and that sort of thing, but like any kind of more color on a specific situation where this part of Innovation Studio and what you're doing really was the tipping point for the deal?

Terry, I'm going to have Jonathan join us today, and he runs the business, so he deserves the credit for that. But I would say that we had three really large customers in yesterday and today. The segments that we had with them, there was a slotted hour on Innovation Studio, and it ended up being a two, two-and-a-half-hour conversation on places that they can go with it because there are a lot of different ways they can use this to drive innovation and partnership with FinTech. But let me have Jonathan kind of cover how he sees that playing out because he runs that business.

Yes, thanks, Terry. So to get into your question, when you think about the specific segments they're looking at, this is all really about how do they get the opportunity to engage more with their end users. We're trying to figure out where in the financial journey of a consumer, a small business, or even a corporate end user of a bank or credit union has the opportunity to engage with these applications in a more tangible way inside the bank. So think of areas like digital customer support; there are a lot of technology vendors out there that are solving for that inside the FI channel. We're bringing those partners into the platform by opening up through the SDK, areas like payments and money movements, HR payroll, anywhere where they are basically adjacent to the financial journey and not a core product necessarily of the bank; how can we bring these best-in-class fintechs into their experience so they can get that incremental engagement with the end user. That's across, like I said, consumer and small business, so the most frequent end-user use cases we're seeing.

On that, Jonathan, will you receive residuals from some of these third-party tools since you're not in the HR payroll space or digital customer support? Will you earn money through a reseller relationship? I also have one final question.

Yes, exactly. We'll dive much deeper into the model at the Investor Day, Terry, but you kind of hit on it. We're striking revenue share arrangements with these partners. In many cases, through the marketplace model, we're sharing that revenue back with the financial institution to try and help drive a new non-interest-related revenue stream for the FI. But yes, we're striking share relationships with these partners and trying to incentivize adoption within the FIs, but also making the channel attractive to these fintechs.

Okay. And my final part of my three-part question, and sorry, Matt and David, you guys are getting short strip today since we have Jonathan performing, is on the BaaS business. I'm curious, Jonathan, there's been a lot of consolidation in some BaaS vendors that have been acquired or merged, et cetera. Are you seeing any kind of dislocation or disruption that's creating incremental opportunities for you all to get new design wins? Just maybe what the competitive environment is like in kind of takeaway environment?

Yes. We certainly see a lot of activity, whether it’s consolidation, fundraising, new start-ups in the space. It’s obviously very early – in the early innings in the BaaS market, and we think we’re in a very differentiated position with our scale, our flexibility, and our bank of record network. We’re seeing it and we’re watching it, but we’re also going after a very targeted segment of the market that is the largest Tier 1 fintechs and brands. We really feel that there are very few players that can serve that market at scale. That’s how we’re differentiating right now. We think that as we move in, we talked about business account functionality, and we continue to invest in this business in the roadmap, we think we’re in a good position. You’re right; a lot of consolidation is happening. Some of that consolidation is happening between theoretical competitors in the market, which makes customers potentially leery of where to place their data, what programs to work with, etc. So it’s interesting, it’s probably too early to tell how much the consolidation could drive opportunities our way or churn within existing competitors, but we’re clearly watching it, and there’s a lot of activity in the market.

Your next question comes from the line of Sterling Auty with JPMorgan.

So for my question, I want to ask on kind of the supply side. In other words, on your sales and sales productivity and capacity. It's great to hear the increase or the more positive tone around bookings. Where are you in terms of capacity utilization within the sales force that you have today? And what are the hiring plans that you have to kind of support that improved demand environment that you're seeing out there?

Yes, thank you, Sterling. As David mentioned, we are currently developing our plan for 2022. We have brought on Mike Volanoski as our Chief Revenue Officer, who has extensive experience with large enterprise sales organizations. He is reorganizing our enterprise account teams to maximize leverage from both existing and potential customers. At this point, we do not anticipate significant spending in sales, while we expect a modest increase in marketing investment to enhance our messaging and drive demand generation, as our messaging is resonating well. David can correct me if I'm wrong, but I believe Mike's efforts to expand within current customers and secure new deals will lead to increased efficiency. We have also adapted well during the pandemic, working remotely and utilizing our resources, such as our strategy office and advisory consulting groups, to reach more customers without travel. Overall, we feel confident in our current coverage model and in Mike's direction for 2022 and beyond.

Yes, to expand on that, as we assess 2022 in relation to the sales organization, much of the expenditure will focus on building the top of the funnel pipeline through marketing programs. Additionally, we anticipate an increase in some tactical spending, particularly in travel and expenses, which we expect to rise again in the second half. Although we do not foresee a return to pre-pandemic spending levels next year, we believe that our spending will be higher at the end of this year compared to the conclusion of last year.

Your next question comes from Bob Napoli with William Blair.

I appreciate all the information. I have a question about the model, and I know you'll go into more detail on December 14. Given the recent changes in the business mix and how you've broadened the business, what do you see as the appropriate gross margin and EBITDA? Given the apparent incremental investment opportunities, has the timeline for expanding those margins been extended?

Yes, Bob. I mean, you're right; we do have incremental investment opportunities, and we want to make sure we take advantage of those opportunities. However, as we're looking out to 2025 and beyond, we certainly see a landscape which we can expand our gross margins and our overall EBITDA margin substantially over a period of time. I think it's going to be really instructive to have those discussions with you in December because we'll be able to show you the shape of how we think that can happen over a period of time. It's not going to be linear, as you can imagine. But we're going to talk specifically about the opportunities that we see to drive efficiencies while at the same time making these important investments, many of which are happening now. Yes, we do see the opportunity to expand those margins. We do see it over the course of the next 3 to 4 years, but we're not going to get into specifics quite yet. We'll provide that color in December.

Can you discuss the growth in the backlog, including the year-over-year and sequential numbers, as well as any changes in the timing of recognition and backlog compared to historical data?

No. What was great this quarter was when you look at the makeup of backlog in terms of how we add to backlog year-over-year, it came from all key buckets: cross-sell, renewals, and new. We saw a really good growth in net new bookings year-over-year, which Matt mentioned; all three quarters this year we’ve seen really good year-over-year growth in cross-sell. We had the best quarter of renewals this quarter that we've seen in a while back. The quarter for Q3 in terms of renewals that add to backlog was greater than the first half in its entirety. So it was a great mix for us to see all three of those areas the business deliver. We see Q4 historically has been a really strong renewal quarter, and we see that opportunity again this Q4. If we pull some of those renewals in from Q1, it could put some pressure on Q1 backlog, but we feel really good about how we're positioned for Q4.

Your next question comes from the line of Andrew Schmidt with Citi.

Good to see progress on the net new side. I wanted to dig in a little bit on the digital banking competitive environment. If you could talk a little bit about how the competitive environment is evolving and your current engagement? It seems like, if customers are demanding multiple solutions, getting a little bit more sophisticated, that seems like an advantage for you and other scaled players. I'm just curious if you're seeing any difference on the competitive side in terms of capabilities, pricing, anything like that, relative to what we would see pre-pandemic.

Yes. Thanks, Andrew. No, I mean, the competitive environment is largely the same. There are new names that have come to the surface with you guys. But, in general, I would continue to say that as far as a full platform, we're looking for retail and commercial banking solutions, whether it's a bank or a credit union or both, we do very well in those scenarios. We signed a standalone retail deal, a standalone commercial deal, and a combined retail commercial or corporate banking solution in the quarter on three Tier 1s. So in highly competitive deals. We continue to differentiate in all those categories. As I've said before, the retail digital banking space is pretty crowded. We're trying to be cautious in those deals. I think if you look at it from a win rate perspective, I think they're holding steady to what they've been historically. I think there's a chance for our win rates to improve as we move forward into Q4 and '22 based on the wins that we're having right now and what I'm seeing in the pipeline. It's still a very competitive environment, and we're doing very well in that environment.

I appreciate your comments on that. Now, David, I thought achieving over 20% growth in the quarter was quite strong, especially given the slowdown in net new activities. Could you break down the contributions from organic user growth, transactions, and maybe some small go-lives? Additionally, you projected 15% to 16% growth for '22. Considering that we're experiencing 20% growth in a scenario with very limited go-live activity, why isn't this 20% level expected to be sustainable as we move into next year?

Yes. And the biggest reason for that, I know we've been talking about this now for a few quarters, is this air pocket concept. I mean when you have five quarters in a row where you got COVID and pandemic impacted demand/bookings, that ends up manifesting itself at some point in time. With our delivery model of 9 to 16 months in terms of the most complex at 16, we're going to see those five quarters impact the 2022 revenue fairly significantly. You see that right now in our Q4 guidance; it’s 20% to 21% revenue growth, which is a drop-off from where we've been year-to-date. We certainly expect that to continue in terms of going lower, obviously, with that 15% to 16% floor I referenced. But then we'll start to see the benefit of the Q3 bookings second half of next year. We talked about those three Tier 1s; most of those are going to go live in the third quarter and maybe the fourth quarter of next year. So you start to see that revenue come on board late next year and start to see that revenue acceleration as we exit FY 2022 and then observe the real benefit of that in FY 2023.

Yes. I would add, Andrew, that if you think about 2016, we had discussed a slowdown in decision-making, and there were three quarters of a challenging period that we navigated, which extended into 2017. The situation is similar now; we are currently experiencing a prolonged seven-quarter period of pressure on bookings. This challenging phase will resolve itself by 2022 and positions us for a strong 2023.

Your next question comes from the line of Pete Heckmann with D.A. Davidson.

I wanted to follow up a bit on PrecisionLender. It seems that in each of the last 3 quarters the company has been announcing either new deals or expansion for loan pricing, and I'm curious, do you think PrecisionLender is poised to meet or exceed your original goals or $30 million to $35 million in revenue at the time of acquisition, sometimes get to that run rate here in the next couple of quarters?

Yes, I'll address that and David can discuss the run rate as well. PrecisionLender had a strong performance in 2021, and we even had some enterprise deals that transitioned into the fourth quarter that we're currently working on. The pipeline looks promising, and the activity is encouraging. You might have noticed the partnership announcement we made with BCG regarding their development of a product based on PrecisionLender. I feel optimistic about the current pipeline. I believe they will meet or possibly exceed our expectations from when we acquired the business. They faced some challenges in 2020 due to decision-making at the enterprise level within banks. However, things are looking up now, and I'm confident about the pipeline for both the fourth quarter and 2022.

Yes. Just keep in mind that they were impacted, obviously, and we talked about this fairly extensively on numerous earnings calls that the PL business was impacted by the pandemic. So the original business case was done without contemplating that impact. We do feel like with the momentum that Matt referenced and the strong pipeline that we’ve gotten PL and all the things that we see lining up over the course of the next few quarters, that run rate could certainly be achieved within the next couple of quarters. In other words, if you take that quarterly revenue that we see coming from PL over the next couple of quarters and run rate that out, it would certainly be at or above those levels that you referenced.

Your next question comes from the line of Alex Sklar with Raymond James.

So Matt, I want to ask kind of just bigger picture on the post-pandemic trends and kind of as it relates to the strong bookings this quarter, but are you starting to see more urgency from some of the FIs to kind of modernize their digital banking capabilities in order to retain customers? Or is there some other commonality that drove the bookings activity kind of across the finish line and look normally a seasonally slower quarter?

Yes, thanks, Alex. What you're observing is that our customers have recently shifted their main focus from primarily navigating the pandemic to now prioritizing their own customers and figuring out how to assist them in emerging from it, whether through PPP or other means. Currently, there is a notable increase in the involvement of executives in decision-making processes, likely influenced by a renewed urgency and the significance of digital experiences moving forward. Many financial institutions are restructuring their reporting models, introducing roles such as Chief Digital Banking Officers who now report directly to the CEO, highlighting the recognized importance of these roles in decision-making. During 2021, many firms extended contracts with existing vendors while uncertain about market developments due to the pandemic. Now, we are seeing the fruition of decisions that had been postponed in 2020 or 2021, which is reflected in our pipeline for Q4 and 2022. I'm optimistic that this momentum in bookings will persist. We remain exceptionally well-positioned given our comprehensive platform, our integration experience, the caliber of our customers, and our history of successful implementations. I feel confident about our outlook going forward, but we must maintain our focus on execution, our customers, our prospects, and our company culture.

Yes, I mean, if you look at the numbers, year-to-date, I think we've had a total in the customer base 83 acquisitions or mergers that have occurred, and 78 of those have been where we have been the acquirer or the merger of equals. So 94% of those deals have gone our way. Year-to-date, I think with 36 total acquisitions, 34 were where we’re the acquirer or the merger of equals. Those numbers are phenomenal. They align with what we've said all along, we've got the traction that occurs, the most strategic financial institutions want to partner with us. Those financial institutions are taking a long-term view on technology. Therefore, they are going to be the acquirers; they're going to grow in their regions. Those numbers are very difficult to repeat. I feel very good about the mergers and acquisitions activity coming in our favor. The only challenge right now is the Federal Reserve has got a backlog, and the delay around these mergers is – that’s another thing that’s probably not going to contribute much to 2022. You're looking at nine, but in some cases, it’s maybe the 12 months of approval for some of these acquisitions. Beyond that, I’ll still take it. It is something we will get down the road when it comes on, and it’s growing our base, and it grows our opportunity to expand with them. The M&A activity continues to be extremely favorable for us and a tailwind.

Your next question is from Matt VanVliet with BTIG.

Good job on the quarter. I guess, when you look at a number of these new opportunities around digital banking, both from the Innovation Studio and some of the other acquisitions you made and then also on the lending side, it seems like you're finally seeing some strong success cross-selling, and in one case, this quarter, even selling it all together. I guess the bigger question following on one earlier as well, but what's the deal impact when you're able to sell multiples of these products over the top of digital banking? How much of an uplift to whether it's recurring revenue from a deal or total contract value should we think about some of these adding in? And then in the case of adding the lending components to digital banking, how frequently is that now being discussed in net new deals?

Yes, Matt. As we explore the products and the cross-sells we have, the primary offerings we're currently selling to our customers include data-driven or digital acquisitions, onboarding for both retail and commercial customers, and risk management products like Centrix and our fraud solutions. The Innovation Studio is increasingly becoming a significant aspect of our cross-selling efforts. Each of these has varied uplifts depending on their impact, the size of the customer, and their specific needs. Regarding digital banking and digital lending, we aren't experiencing price pressure; selling digital banking doesn't necessitate reducing digital lending, as they are distinct products that customers and prospects recognize require dedicated support and implementation. It's challenging to quantify, but the real value lies in acquiring new clients; we present a compelling case that is difficult for competitors to match, as banks and credit unions prefer not to piece together different vendors and technologies that aren’t fully integrated. They prefer a single vendor to unify everything. This differentiation is likely to yield better win rates than we have seen previously. It offers a significant expansion opportunity for us within the business and contributes to our optimism moving into 2022, as these banks are confident that their customers are stable and will continue to thrive. They will start investing in technology since they have witnessed the efficiencies and opportunities to enhance revenue or improve engagement with their customers.

Yes. I mean, it’s interesting because if you take the baseline of just a retail digital banking deal and then you say, hey, what is that expanding either over time with an existing customer or for a given opportunity, if you add commercial in there, you add risk management, you add account onboarding, you add digital lending solutions, it becomes a multiple of that original deal. We're talking about multiples of the original deal. You see significant amounts of opportunity on top of that original digital banking retail deal that I referenced earlier. The other thing that’s important to add, you referenced this, and Jonathan's here in the room is, we also layer in there a much different economic model with the transactional nature of the Innovation Studio. That’s one we feel is going to be really rich and creates this flywheel approach going forward that we're really excited about, quite frankly. You have the traditional subscription-based model; as you start adding on more and more of these products, it becomes a significant incremental revenue stream relative to the deal as a digital banking retail deal. And then you have a different economic model, and it's transactional in nature when you add the Innovation Studio component to it.

I have a quick follow-up on something you mentioned earlier about extending the duration of deals as you add products. Reflecting on the last downturn you referred to in 2016 and 2017, I assume that the original contracts averaging a 5-year term are now due for renewal. Should we expect the renewal cycle to be elevated over the next 4 to 6 quarters, or have you managed the renewal cycle more smoothly over the last couple of years?

No. Matt, actually, last year, we saw an outsized amount of renewals occur, and a lot of that was market-driven. As we talked about last year, we saw a lot of customers reach out to us proactively to renew with us, given the uncertainty with the pandemic. We also had programs that we ramped, the Q2 care program as an example, to incentivize customers to renew with us and give them some economic relief. That resulted in an outsized year last year, and not only included what was in target, but it also included bringing in some out-of-target renewals. Now I bring this to short-term; I mentioned this earlier that we do see Q4 as a big renewal quarter, and this year will probably be no exception. You typically then see a dip in Q1. For modeling purposes, understand Matt as you're thinking about how backlog starts to play out over the next couple of quarters. I would not expect next year to be an outsized year in terms of renewals because we pulled so much that into FY 2020.

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

This is Jonathan on for James. Want to build on Andrew’s question from earlier. As the new bookings environment improves for you, it presumably also improves for competitors. Can you talk through how you’re thinking about potential customer churn? And perhaps the pricing environment given the renewal expectations for Q4?

Yes. Sure, Jonathan. I mean, right now, we're really comfortable with our position with our customers. We're seeing churn rates that are aligned with what we said entering the year, which was sort of a 5% to 6% range. So we feel good about how we're entering 2022. We obviously have an account-by-account buildup of what customers are up for renewal next year, and the relationships with all of our customers, those specifically for renewal in '22 are generally good. We feel like what we provided you earlier in regard to the churn rate is still an accurate reflection of what we're seeing.

Got it. That's helpful. And a quick follow-up on M&A. You talked about M&A in your customer base. But I want to touch on Q2's potential for M&A. How are you thinking about that strategy going forward? How are you thinking about valuations in the current environment? Do you still think you can be opportunistic with capital deployment?

Yes, Jonathan, it’s Jonathan on. I can take that. We are always looking at M&A. Candidly, the pipe is as robust as it’s ever been. The reality is the valuation backdrop is challenging from a buyer’s perspective, so we’ve got to be disciplined about the quality of the assets. It’s clear a lot of people are in the market trying to take advantage of that valuation backdrop. We’re looking; we’re always interested, but at the end of the day, we’ve got to be prudent from a valuation standpoint, and we got to find the right strategic fit. Marrying those two things together throughout 2021, outside of the ClickSWITCH deal, has not been something that we found. There’s lots of opportunity out there, and we’re always going to be looking. It’s just a question of those two things coming together.

There are no further questions at this time. I will now turn the call back over to the speakers for closing remarks.

Thanks, everybody, for joining us today. We look forward to diving deeper into the business and the future of the business on December 14 at our virtual Investor Day conference. If you need any information, please reach out to Josh. Thank you very much. Excited about the quarter we have and look forward to a strong finish to the year and a really strong 2022. Thank you very much, and have a great day.

This concludes today's conference call. You may now disconnect.