Q2 Holdings, Inc. Q4 FY2021 Earnings Call

Good morning. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings Fourth Quarter and Full Year 2021 Financial Results Conference Call. Thank you. I would now like to turn the call over to Josh Yankovich, Investor Relations. Sir, please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for our fourth quarter and full year 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. 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 annual report on Form 10-K to be filed this week 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 fourth quarter and full year results and highlights from across the business. I'll then hand the call over to Jonathan to provide more insights into the emerging businesses organization he oversees. David will then discuss our financial results in more detail as well as guidance for the first quarter and full year before I conclude with a look ahead to 2022. In the fourth quarter, we generated non-GAAP revenue of $132.3 million, up 21% year-over-year and up 4% sequentially. Non-GAAP revenue for the full year was $500.8 million, up 23%. Our registered user count at the end of the year was 19.2 million, up 8% year-over-year and flat sequentially. We closed out 2021 on an extremely strong note. And as I look back at the full year, I'm proud of the way our team performed. On the sales front, it was a year characterized by two distinct tasks. Bookings performance during the first six months continued to be impacted by the pandemic. However, we saw significant improvement in the buying environment in the second half, with a solid third quarter of broad base net new activity and an even stronger finish to the year in the fourth quarter. These two quarters combined for the best bookings half in company history. Over the course of the year, we signed nine enterprise and 13 Tier 1 customer contracts across our digital banking and lending platforms and had strong renewal rates. With all this activity, we exited the year with more than 1,200 financial institution customers and over 1,300 total customers. On the innovation front, our teams continue to deliver new and innovative solutions. We launched the Q2 Innovation Studio and added more than 50 technology partners that can drive even more engagement, stickiness and revenue opportunities for our customers and their end users. We also added the ClickSWITCH team and solutions to our digital acquisition capabilities, which has helped us land and expand with key customers and drive more profitable accountholder relationships. And in a year in which we remain primarily remote, we continue to invest in our people, our culture and our brand, which is key to our success. We exited the year with more than 2,000 employees, up 16% year-over-year and were named the top workplace for the 11th year in a row. We also launched our initial ESG report to provide more insight and visibility into our numerous environmental, social and governance initiatives. Last but not least, we supported our customers through unprecedented volumes of digital engagement. Over the course of the year, our customers' accountholders logged into our digital banking platform more than four billion times. Today, more than ever, digital is how our customers deliver their brands and interact with their account holders. And we use the data from this engagement to enhance our products and help our customers operate their business. In 2021, we moved more than $2 trillion on our digital banking platform and helped lenders price approximately $4 trillion in commercial loans. Today, many commercial clients expect their entire banking relationship to be digital. And we believe that this data illustrates our success in digitizing both banking and lending for our commercial customers. These significant levels of engagement apply to our Banking-as-a-Service solutions as well. As of year-end, our Banking-as-a-Service platform supported more than 11 million users and processed more than $20 billion in transactions. In total, we believe the engagement we saw in 2021 illustrates how the pandemic has further accelerated a durable shift to digital across customer types and in almost all aspects of the financial relationship. Our ability to support this level of digital engagement is the culmination of a lot of hard work from our delivery and support teams, strong sales execution and a constant focus on innovation. With that perspective on 2021 in mind, I'd like to shift the discussion to the fourth quarter more specifically. First, we had our Investor Day in December, where we shared our views on the future of the industry and why we believe we are in a favorable position to capitalize on the significant opportunity. We believe financial institutions, fintechs and brands are converging, creating a new frontier in financial services. In this new frontier, financial institutions will look to digitize every aspect of their business. We have deliberately assembled a portfolio of solutions designed to capitalize on this shift and believe we are uniquely positioned to partner with customers across banking and lending from retail to small business to commercial. We saw this play out in our sales execution in the quarter where we had broad base sales success both in signing new customers and expanding existing relationships. As a result, the fourth quarter was the second-best bookings quarter in company history. And we view the accelerating sales activity as a signal that financial institutions of virtually every size are engaging in a widespread technology refresh. Meanwhile, in the new frontier, fintechs and innovative brands are rapidly moving into financial services, creating competitive pressures and new business models, which we believe lead to new opportunities for partners like Q2 to leverage technology to bring these constituents together as partners. We do this through two primary offerings, with the first being Q2 Innovation Studio, a developer and partner ecosystem that allows our customers and partners to innovate like never before on our digital banking platform. The second offering is our Banking-as-a-Service solution, which provides innovative brands, the technology and financial institution partners they need to embed financial services into their ecosystems. These emerging offerings gained further momentum in the fourth quarter as well. We continued to rapidly add new technology partners to Q2 Innovation Studio and saw it contribute meaningfully to net new deals, new digital banking wins and expansion activity with existing customers. On the Banking-as-a-Service side, we renewed three of our five largest customers with multiyear contract extensions, reinforcing the confidence our customers have in our platform and strategic roadmap. We also just unveiled a new brand for Q2 Banking-as-a-Service called Helix, which Jonathan will unpack in more detail shortly. So now I'd like to dive a bit deeper into our sales performance from the quarter, which we believe demonstrates how these market forces are creating tailwinds for our business. I'll start with digital banking, where we signed a broad mix of deals including three Tier 1 customers. One was a top 100 U.S bank that had used our Corporate Solutions for several years, renewed that agreement while also adding retail and small business banking, thereby more than tripling the committed revenue contribution of this customer. The second Tier 1 deal was with a bank that is rapidly accelerating its investment in technology, with a particular focus on implementing a unified platform across all channels. Where our single platform for retail and commercial gave us a big expansion opportunity with the Tier 1 client I just discussed, this was a key reason Q2 was selected for retail, small business, and commercial functionality. Our continued innovation on the digital banking side also gives us a broader set of solutions to provide our customers. As a result, we've seen the average sales price of digital banking deals trend up over time. As we have mentioned before, Tier 2 deals can also carry a bookings impact similar to that of a Tier 1 customer. The second largest digital banking deal we booked in the fourth quarter was actually a Tier 2 bank that will incorporate retail, small business, and commercial products. Finally, our portfolio gives us opportunities to land key accounts with ancillary solutions. For example, in addition to being included in numerous net new digital banking deals, we also booked one enterprise and four Tier 1 ClickSWITCH standalone deals in the quarter. Landing new clients with solutions like digital acquisition and onboarding or risk management is important because it helps establish a relationship with a customer and makes it easier to expand these opportunities into other areas of our portfolio over time. Shifting to the lending side, we have meaningful activity across our loan origination and loan pricing solutions. In total, we signed five enterprise and four Tier 1 deals in the quarter comprised of both net new and expansion wins. On the loan pricing side, our enterprise wins included a top five U.S bank that purchased the full loan pricing suite and a top five Canadian bank, which included winning separate opportunities for their U.S and Canadian businesses, reflecting the global opportunity we're seeing with our lending solutions. We also had meaningful loan pricing expansion activity in the quarter. We have seen this expansion take several shapes. For example, we had an existing client, a top 10 U.S bank expand their use of our solutions into a large new line of business that grows the revenue contribution of this partnership substantially. We're also seeing more conventional cross-sell activity where a client starts with a loan pricing product and then adopts incremental functionality. This was the case with an existing Tier 1 client that started with a single module in late 2020 and purchased the full loan pricing suite in the fourth quarter. Expansion is a key driver for our lending solutions. With our three largest enterprise customers, we have seen the contracted average recurring revenue more than double in the first two years of the relationship. Finally, when you consider the buying activity in the Enterprise segment of the market slowed considerably at the height of the pandemic, we think our success with net new and expansion sales in the quarter is encouraging and provides us with optimism around the buying environment heading into 2022. On the loan origination front, we had a particularly strong quarter of cross-selling into existing digital banking customers, especially with our treasury onboarding solution. We had five such cross-sales in the quarter, including two Tier 1 deals. Onboarding commercial clients is a critical step in the relationship and one that has remained largely manual and paper based. We believe our recent success in this area is just another proof point that financial institutions are looking to digitize virtually every aspect of their business. Overall, we're pleased with the momentum in both digital banking and lending in the fourth quarter. We believe the quality and breadth of these wins demonstrate our ability to serve a broad market opportunity. We also had an exciting quarter with strong activity in our emerging businesses organization. And I'll now hand the call over to Jonathan to provide highlights from Q2 Innovation Studio and Helix.

Thanks, Matt. As we discussed throughout the pandemic, innovation has become critically important for financial institutions. New entrants into the space are creating incremental competitive pressures, and accountholder expectations for innovative digital solutions are at an all-time high. Over the last several quarters, we shared stories about the Q2 Innovation Studio, which provides our customers and partners with API and SDK based access to our digital banking platform. In doing so, it enables them to extend and add new experiences to their digital banking environment faster than ever before. By helping our customers deliver technology rapidly, Innovation Studio can drive deeper engagement in the digital channel and add solutions that generate new non-interest related revenue. In the fourth quarter, we saw continued success with Q2 Innovation Studio, adding 16 new partners to our fintech ecosystem. We believe that adding new partners can help us create substantial value for our customers and Q2 over time. First, the contributions from these partners provide us with meaningful cross-sale opportunities with our digital banking customers. For example, one of Q2's top cross sold products in the quarter was an Innovation Studio partner solution. That product also yielded two of our largest individual cross-sales. The second advantage is that it can unlock verticals in which we otherwise don't currently access. Segments like HR and insurance, for example, which we believe can open an expanded addressable market for us over time. During the fourth quarter, we added another vertical through an investing and money management solution that we can now offer directly to our customers, allowing us to tap into this attractive market for the first time. Finally, because of the speed and flexibility the Innovation Studio provides, we're seeing it create competitive advantages in the market. During the quarter, Innovation Studio not only helped us expand existing customer relationships, but was also included in and cited as a key reason we won roughly a third of our net new digital banking deals. And today, nearly half of our digital banking customers are using at least one of the Innovation Studio programs. The convergence we're seeing in financial services is also characterized by the continued growth in innovative brands looking to add banking products directly into their ecosystems, allowing their customers to save, spend and borrow directly with them in the context of the products and services they provide. To accomplish this, these brands need modern technology on which to build these products, and a financial institution partner to provide the required regulatory infrastructure. We package these strategic components in our Banking-as-a-Service offering, which today supports some of the most innovative brands deploying this embedded finance strategy. And we've had several recent highlights from this business that I'd like to share. First, as Matt mentioned, we announced the rebranding of Q2 Banking-as-a-Service as Helix on February 2. We've shared our view that the embedded finance trend is growing in momentum, and how important we believe the Banking-as-a-Service strategy is to our future growth opportunity. By making the strategic shift to Helix, we are building a new identity in the industry, a brand designed to resonate with a target market that is distinct from the leverages of our core market and a platform that allows these innovative brands to easily embed personalized financial experiences in context and at scale. As one of the first players in the Banking-as-a-Service market and powering embedded finance for some of the largest and most innovative companies in the country, we look forward to seeing the growth this next evolution of our platform can drive for current and future partners. On the sales side, we continue to sign net new deals and generate strong renewal activity in the quarter, including significant renewals with three of our five largest Helix clients. Our success in this area was highlighted by a multiyear renewal with our largest customer, Credit Karma. In a model where usage is the primary driver of scale, retaining and growing with our largest clients is paramount. So, we were thrilled to see such a strong quarter of key renewals. Overall, as traditional financial institutions, fintechs, and innovative brands continue to converge, we believe Q2 Innovation Studio and Helix are enabling these parties to work together for their mutual benefit while helping Q2 build a sustainable competitive advantage. Thank you. And with that, I'd like to pass the call to David to discuss our financials.

Thanks, Jonathan. We're encouraged by the momentum we're seeing in the business, and we're pleased with our financial results for the quarter, with revenue coming in near the high end of our guidance and EBITDA well exceeding our guidance range. I will review our results for the fourth quarter and full year 2021 before finishing with guidance for the first quarter and full year 2022. Total non-GAAP revenue for the fourth quarter was $132.3 million, an increase of 21% year-over-year and up 4% sequentially. Total non-GAAP revenue for the full year was $500.8 million, up 23%. Both the year-over-year and sequential increases for the quarter were primarily driven by an increase in subscription revenue associated with the deployment of new customers and continued organic growth from existing customers. We ended the year with approximately 19.2 million registered users, an increase of over 1.4 million users or 8% year-over-year and flat sequentially. The year-over-year increase was attributable to strong organic user growth throughout the year and new customer go-lives concentrated in the first half of the year. Flat user count sequentially reflects typical levels of organic user growth, combined with the slowdown in new customer installations and known back-end concentrated customer user churn. As we previously discussed, we had expected a slowdown in customer installations in the second half of 2021 as a result of the pandemic's impact on bookings throughout 2020 and the first half of 2021. We anticipate this lower level of new customer installations will continue in the first half of 2022 before increasing in the third and fourth quarters, driven by the bookings improvement we observed in the second half of 2021. Transactional revenue represented 13% of total revenue for the quarter, consistent with the prior year period and down from 14% of total revenue in the previous quarter. For the full year 2021, transactional revenue represented 14% of total revenue, which is consistent with the prior year due in part to the increased growth contribution of transactional revenue generated from Helix, which significantly outpaced revenue growth generated from traditional bill pay. At our Investor Day in December, we announced that we will begin disclosing annualized recurring revenue or ARR at the close of every year. As a reminder, this metric reflects an annualized view of subscription services, transactional revenue and revenue generated from premier services at the end of the reporting period, in addition to all of the contractually committed recurring revenue in place at the end of the reporting period. ARR grew to $574.2 million, up 24% year-over-year from $464.2 million at the end of 2020. This year-over-year growth rate compares to a 16% growth rate observed at the end of 2020. Our ARR growth acceleration for the year was driven largely by new and cross-sale bookings, particularly in the back half of the year. In addition, we observed ARR growth resulting from increasing run rates associated with existing customers, most notably coming from our Helix solutions. ARR was also up 6% sequentially from the third quarter numbers we disclosed at our Investor Day, primarily due to the booking strength we observed in the fourth quarter. Our ending backlog of $1.4 billion increased $121.7 million sequentially or 9% and equated to a 10% increase year-over-year. The sequential and year-over-year increases in backlog are primarily attributable to net new bookings in addition to expansion opportunities. Sequential increase was also driven by our strongest renewal quarter in two years. As a reminder, the biggest driver of changes in backlog are net new bookings and renewals. Renewals are subject to seasonality as well as the number of opportunities and target. As a result, while it's possible, we could see a sequential decline in backlog for the first quarter of 2022 due to having less renewals in scope, we believe we will have a strong year-over-year backlog growth for the full year of 2022. Our revenue churn for 2021 was 5.4%, down from 5.9% in 2020. This revenue churn was slightly better than we expected at the beginning of the year based on strong renewal activity. As we continue to work with our customers to broaden the solution-base we provide to their end users and strengthen relationships. As we previously mentioned, we have historically been a beneficiary of bank M&A activity, and in 2021, we saw the continuation of that trend. Of the M&A announcements made during the year which involved the Q2 customer, our customers were the acquirer or involved in a merger of equals in over 90% of those transactions, which gives us belief that we will have potential revenue opportunities and a minimal impact to revenue churn in 2022 from recent M&A activity. Given the anticipated expiration of our PPP solution contracts in 2022, we expect our revenue churn levels for the year could increase modestly to around 6%. However, this incorporates our belief that the digital banking revenue churn specifically will decline year-over-year. At the end of the year, our digital banking platform installed customer count was 448, down from 450 at the end of 2020. The year-over-year change in customer count was associated with the increase of bank M&A activity amongst our customer base, including instances in which our customers were acquiring existing Q2 customers. We also had fewer new go-lives take place in 2021 due to the pandemic's impact on buying beginning in early 2020. Our trailing 12 months net revenue retention rate for 2021 was 119%, down from 122% in 2020. Our elevated retention rates in 2020 included the contribution from the acquisition of PrecisionLender, which took place in the fourth quarter of 2019. Gross margin for the fourth quarter was 51.5%, up from 48.3% in the fourth quarter of 2020 and down from 51.9% in the previous quarter. The year-over-year increase in gross margin is primarily due to a decrease in services costs, resulting from an accounting adjustment recorded in the prior year period, which accelerated the professional services costs associated with projects in progress for our cloud lending solutions. A primary driver of sequential decline in gross margins was an increase in costs associated with the installation of some larger digital lending customers during the quarter. For the full year 2021, gross margin was 51.9%, which was consistent with the prior year. Total operating expenses for the fourth quarter were $61.5 million, or 46.5% of revenue, compared to $50.1 million, or 45.7% of revenue in the fourth quarter of 2020 and $62.4 million, or 49.1% of revenue in the third quarter of 2021. The year-over-year increase in operating expenses as a percent of revenue was driven primarily by the onboarding of additional team members concentrated within R&D as well as sales and marketing. As a reminder, the incremental headcount associated with the acquisition of ClickSWITCH was concentrated within R&D. We ended the year with 2,028 employees, up from 1,749 at the end of 2020. Adjusted EBITDA was $10.8 million, up from $6.1 million in the fourth quarter of 2020 and $7.3 million in the previous quarter. Our overall performance relative to guidance for the quarter was driven primarily by effectively managing operating expenses across most spending categories. Adjusted EBITDA for the full year was $37.9 million, up from $22.2 million in 2020, up 70% year-over-year. We ended the year with cash, cash equivalents and investments of $427.7 million, up from $394.6 million at the end of the third quarter. This increase was largely a result of strong profitability and good working capital management resulting in favorable cash flow from operations. Our capital expenditures for the quarter were $3.7 million. Our total CapEx spend for the full year was $19.8 million or 3.9% of revenue, which is down from 5.8% in the prior year. In 2022, we expect our total CapEx cash spend as a percent of revenue to be near the low end of the 4% to 6% range we've historically operated in. Cash flow from operations for the fourth quarter was $39.3 million, which is the highest quarter on record. The strength in operating cash flow was primarily attributable to increased levels of profitability, good working capital management, and favorable seasonality. As a reminder, we previously stated that the timing of an extra payroll run in Q3 of 2021 will result in more favorable operating cash flow in Q4. This extra payroll cycle does come back in Q1 of 2022, which coupled with other working capital seasonality will likely result in a net use of cash from operations for the first quarter. However, we believe we will experience year-over-year growth in operating cash flow for the full year of 2022. We generated free cash flow of $33.7 million during the quarter, resulting in free cash flow for the full year of $5.3 million, the first time in our history generating positive free cash flow for the year. Let me wrap up by sharing our first quarter and full year guidance. We forecast first quarter non-GAAP revenue in the range of $131.5 million to $133 million and full year non-GAAP revenue in the range of $576 million to $581 million, representing year-over-year growth of 15% to 16%. As a reminder, due to the timeline associated with deals booked in the back half of 2021, we do not expect revenue recognition to commence with the vast majority of those bookings until the back half of 2022. As indicated in our guidance, we believe our year-over-year revenue growth rates exiting 2022 will be higher than those observed in the first half of the year. Now we will be positioned for annual revenue growth rate expansion in 2023. We forecast first quarter adjusted EBITDA of $7.7 million to $8.7 million and full year 2022 adjusted EBITDA of $40.9 million to $43.9 million, representing 7% to 8% non-GAAP revenue for the year. In summary, for the fourth quarter, we delivered solid revenue results and better-than-anticipated profitability. We generated positive free cash flow for the full year and closed out the year with our second-best quarterly bookings performance on record, driving meaningful increases in our key leading indicators such as ARR. In 2022, we expect to continue to invest in our growth opportunities, which we believe position us to capitalize on our long-term market opportunity. And with that, I'll turn the call back over to Matt for his closing remarks.

Thanks, David. To close out today's call, I want to offer a few comments on our business outlook for 2022. First, I'm extremely encouraged by the momentum with which we enter the year as we continue to monitor the ongoing pandemic and the impact of the macroeconomic backdrop on our customers. The sales execution from the back half of 2021 suggests the financial institutions are in a better purchasing position than they were a year ago. We believe one thing that the pandemic has clearly underscored is that the time to embrace digital is now. We are entering a new frontier in the industry, and as a result, we anticipate financial institutions, fintechs and innovative brands will accelerate their investment in financial services technology in the years to come. And when you consider the breadth of our digital banking and lending portfolio, and our competitive advantage with Q2 Innovation Studio and Helix, I believe we are in a unique position to capitalize on the substantial market opportunity in front of us. With that, I'll turn it over to the operator for questions.

Your first question comes from the line of Terry Tillman with Truist. Your line is open.

Yes. Thank you. Good morning, Matt, David and Jonathan. It feels like this is almost another mini Analyst Day. Lots to go over there, a lot of good stuff to hear, and it's good to see the strength and improving bookings in Q4. I have two questions, and I don't know if this is for Matt or Jonathan, but on Helix, I got to get used to saying the name now Helix. I think you all talked about three of your top five customer renewals were in the quarter, and you did call out Credit Karma. So that's good to hear. But could you maybe touch a little bit more on those three renewals? Did they expand some of the capabilities? Have the registered user bases grown meaningfully? And then the second part of this question is at the Analyst Day, based on the math, I mean, this business should be a 40% to 50% CAGR potential, if my math is right, by '26. Is it a linear growth rate over time? Or could there be some kind of spikes or it may not be a smooth growth rate? And then I have a follow-up for David.

Yes, thank you, Terry. This is Jonathan. In all these cases, I believe this reflects very positively on us and demonstrates their confidence in our Helix platform. We have observed rapid growth in user numbers in all three instances, and I anticipate that this trend will continue. Regarding our product expansion and roadmap, they seem to be fully engaged with what we are planning and are providing us valuable guidance on our path forward. We have witnessed an expansion of our offerings with these customers, and we expect more to come. We are quite optimistic about user growth as well. In terms of the nature of our growth, I would say it is not going to follow a linear trajectory. When these programs launch new products, they typically start with their initial offering, such as a new debit program. Therefore, the growth won't be linear, but as we introduce new programs, we will see an increase in users and transactions, leading to spikes in revenue. As they identify their most active users, they will find ways to encourage even more engagement, and over time, we should see both stability and growth. It will be essential to pay attention to new platform launches and product introductions, as these will signal that revenue and transaction growth are on the horizon.

Okay. Thanks, Jonathan. And then just a follow-up for David. Could you touch a little bit more on how we think about the shape of revenue growth through the year? I know you kind of gave some qualitative commentary, but is Q2 the low point and kind of what that low point would be? And then the second part of this on the shape of reacceleration, do you think as we go into '23, we are comfortable with the idea of like two-handle type growth, 20% plus growth? Thank you.

Yes, good morning, Terry. Thanks. Just to give you a little bit more context on that quarterly base growth rate, the first half of the year, we expect to see a similar growth rate year-over-year Q1 to Q2. So, if you think about the 12% to 14% we laid out there in Q1, you can think about a similar type of growth in Q2. Then that accelerates into Q3 with Q4 accelerating growth from Q3. So, we're set up well to have the FY '23 acceleration in growth relative to what we said in the Investor Day in December. We're not going to give a handle lead on that, but we still think that a 300 basis points plus growth rate acceleration in '23 relative to '22 is still absolutely what we are targeting.

Thank you, Terry. Appreciate it.

Your next question comes from the line of Parker Lane with Stifel. Your line is open.

Yes. Hi, guys. Thanks for taking the questions. Matt, some really nice wins on the Tier 1 front this quarter for digital banking. Wondering if you could expand on the determining factors and considerations that banks and credit unions are making in the decision to go with a more modular approach for digital banking versus the full platform for retail small business and corporate? And with some of that urgency that you talked about in your end markets, are you seeing those expansion conversations take place closer to the initial land? Or is it largely consistent with what you've seen in the company's history?

Yes, Parker. Thanks. I would say that what we are facing on the bank and credit union side is a pretty simple proposition, which is either fall behind or you keep up on technology. If you think about what they're faced with, it's a daunting task to take the lending and the deposit side of the house and automate and digitize those experiences. And so, when you think about the surface area our platform and technology covers, we are able to walk into these banks and credit unions and offer them the ability to do retail, small business, and corporate on both the lending and the deposit side. So those decisions, the way they manifest themselves, a great example of that would be we have an existing customer with about $20 billion in assets. They use our retail platform and they use another vendor for their corporate banking. They called us in October and said, we need a wire system that's Dodd-Frank compliant, mobile and desktop in 90 days. We are asking both of you to do this. Which one of you can do it? We did that. Got it live in 90 days, with an English and a foreign language version of it. We're able to do that because it's an on-demand platform. So, we on-demand that wire functionality, and the other vendor would have had to install a whole new wire system for them to do that. So, those examples and that time frame are very difficult for other vendors to compete with us on. So, when you think about the landscape of the marketplace, like I said, they either have to keep up, or they fall behind, and that's what's driving these decisions. It also kind of manifests itself on the Helix side of the business as well, which is they have the user experience, but they need the banking feature functionality. The partnerships we have with our existing customers and our banks allow them to expedite the technology they get into their customers' hands as well. So, the idea of buying a standalone retail Internet banking system without any commercial functionality attached to it and having to have a new system up doesn't allow you to keep up; they fall behind. That messaging is really resonating. And as you can tell, we have I think 22 enterprise and Tier 1 wins in 2021, 16 of those happened in the back half of the year. So spending is opening up, and the banks and credit unions are really making these types of decisions now as they think about the surface area that we offer, which is a much bigger solution than anybody else out in the marketplace.

Got it. Very helpful. And then, David, wanted to dive into the predictability and maybe you can touch on the guidance philosophy on Helix and the broader transactional business. You obviously announced some key expansions on that front during the quarter, and you've had some new customers join the platform this year. Can you just go into what insights you have on the ramp of these customers in 2022 in particular? And what's some of the different levers for upside in the model are with that Helix customer base? Thanks.

Yes, Parker. It's a great question because it's one that we've obviously been working on throughout the year as these programs have started to launch and we started to get some meaningful volume out of them. We've learned from them in terms of the forecasting and the seasonality around them. I think we're a lot more intelligent heading into FY '22 than we were heading into FY '21. So, we do have a better handle. We think that's incorporated into the guidance. There is some seasonality. Some of these programs have higher transaction volume around tax season. We factored that in, and we're obviously going to be continuing to monitor all of these as they launch, one and two, as we start to see user growth adoption and the transactions associated with these users. So, we've really expanded the models that we have around transactional to be more accurate relative to where we were a year ago and feel good about how that's incorporated into the guidance.

Makes sense. Thanks, again.

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

Good morning, everyone. Thanks for taking the question. My first question might be for Jonathan. How are you thinking about the opportunity around real-time payments and the rollout of Fed now? I mean, are there opportunities to look at things like decoupled debit for some of these new programs?

Yes. I mean, it is increasingly a top track amongst our customer base, Pete, and we are looking at all sorts of alternatives, both within our own innovation team as well as the third-party ecosystem. So that's one area where Innovation Studio can come in handy. But we are looking at all sorts of options and just trying to figure out what is the fastest and most efficient way to get that solution into our clients' hands. I don't think I have a clear answer yet on the singular route we are going, but it's certainly top of mind for our bank and credit union customers today.

Okay. And then just in terms of on the lending side, we heard a lot about loan pricing, very strong. It's like every quarter, enterprise and Tier 1 deals. I didn't hear as much on the former cloud lending side. Can you give us an update on how that business performed in 2021?

Yes. Pete, from a business perspective, keep in mind, we’ve announced multiple Tier 1 treasury onboarding deals in the quarter, which is the cloud lending platform at work. We also are seeing success on the small business lending side with that business. It was a tough quarter to compete with the PrecisionLender solution. The last two quarters, they’ve really done a great job of getting in the enterprise. So, I don't want that noise to take away from the success that we are having with cloud lending on the treasury onboarding and the small business lending opportunities that are there. So, it had a strong year, and I think it's just going to have an even better year in '22 and beyond as the product continues to mature and we also continue to integrate into the digital banking platform.

Yes. The other thing I had, Pete, is we had a good quarter overall, once again in cross-selling, and cloud lending had a good cross-selling quarter. They were a big contributor to that strength.

Okay. Good to hear. Thanks.

Your next question is from Andrew Schmidt with Citi. Your line is open.

Hey, guys. Thanks for taking my questions here, and appreciate all the business details. Super helpful. I wanted to dig into the pipeline and the deal cycle. It sounds like the tone is much more constructive in terms of predictability, particularly when it comes to enterprise and Tier 1 clients. Maybe you could talk a little bit about just whether we are getting back to normalization from a sales cycle and decision-making perspective and how that might translate to your visibility from a deal execution standpoint? Thanks.

Yes, Andrew. It's not only Tier 1 and enterprise; there's also significant activity in Tier 2, particularly with banks and credit unions. The positive aspect is that we now have more opportunities that allow for flexibility in our quarterly performance when a deal gets delayed, and we have enough projects to compensate for that. This has led to our second-best bookings quarter in the company's history, and we expect to maintain that momentum into 2022. Banks and credit unions are beginning to think more strategically and are adapting to technological advancements, which has led to increased spending. With interest rates rising, their stocks are performing better, and mergers and acquisitions are on the rise. We're seeing a return to the momentum we had hoped to recapture from 2019 into 2020. Moreover, we've become adept at operating during the pandemic, resulting in improved activity and more leads. Our marketing team is excelling at generating demand, making us feel optimistic as we head into 2022. This contributes to our confidence in the outlook for 2022 and 2023.

Got it. Great to hear, Matt. I appreciate those comments. And then maybe just a follow-up for David. On the user growth, you mentioned some backend customer churn. Maybe you could expand on that a little bit in terms of what's going on? And then just how you're thinking about organic user growth into 2022?

Yes, Andrew. First, I want to address the revenue churn, which decreased compared to last year. As I mentioned in my prepared remarks, we anticipate that digital banking revenue churn will decrease again next year. These are the key factors influencing our financials. We do experience user churn linked to that revenue churn, and it has been more concentrated in one quarter this time, specifically in Q4. This affected the user numbers from one quarter to the next. However, we remain optimistic about organic user growth moving forward because historically, we've seen a stable range between 9% and 11%. We are confident that this trend will continue. Additionally, there are opportunities in the M&A sector, as we've discussed previously, where many of our customers are on the acquiring side. We plan to take advantage of those opportunities, but we believe this is already factored into the 9% to 11% range we've mentioned.

Perfect. Thanks so much, David. Appreciate the help, guys.

Your next question is from the line of Andrew Sklar with Raymond James. Your line is open.

Great. Thanks. You alluded to this in your response to Andrew's first question, and I can appreciate there's multiple post-pandemic tailwinds. But what are you hearing from customers and prospects in terms of the interest rate growth and the propensity to buy technology? And does that change at all between your digital banking, lending and off-platform offerings?

Yes, Alex. Customers are clearly paying attention to the current situation, and the rising interest rates are positively impacting our clients in the banking and credit union sectors. This is resulting in increased conversations, more deals, a higher number of RFPs, and greater activity on the business side. In addition, there is significant movement within the fintech and Banking-as-a-Service landscape, creating pressure across the ecosystem. Brands are exploring ways to enter embedded finance, while fintechs are forming partnerships with both brands and banks, and banks are seeking innovative solutions. Recently, a major customer launched a BaaS initiative during their earnings call. As people emerge from the pandemic, they recognize the necessity of operating with potential variants like Omicron and understand that digitizing their businesses is essential. They need to invest in various channels for both deposits and lending. Our broad coverage enables them to move quickly and stay competitive.

Yes, Bob, we observed a positive increase in user ARPU, rising by about $2 compared to last year. We noticed that as we incorporate more commercial segments, which are growing faster than the retail sector, it’s not surprising that this trend benefits us. The exit rate for ARPU was higher than the full-year average. We experienced not only year-over-year growth but also consistency in momentum throughout the year. Additionally, we finished at a rate that exceeded what was recorded for the entire year.

Your next question is from Matt VanVliet with BTIG. Your line is open.

Yes, good morning. Thanks for taking the question. I guess following up a little bit on, I think, as Andrew's question earlier about the second half bookings performance and Matt, you obviously highlighted, I think it was 22 total large deals across the different products. I'm curious if you can help us think a little bit more about how many of those deals were sort of pent-up demand that had been delayed in terms of decision-making, either throughout early '21 versus kind of net new opportunities coming up in the pipeline later in '21? And maybe how many deals are still out there that you’ve had pretty detailed discussions with customers that still are hesitant to make a decision that you could see come through in earlier '22 in the pipeline?

Thank you for your question, Matt. I understand you're asking if we utilized all our resources from the backlog this quarter and what our confidence is in the upcoming pipeline. Clearly, there has been some accumulated demand, but I feel optimistic about the pipeline for Q1 and Q2, which gives us good visibility for the entire year of 2022. I anticipate a strong year for bookings in 2022 compared to 2021. There are definitely more deals available, and the pipeline is expanding. We're not as pressured this quarter as we have been in the past where we needed to close deals immediately. We have multiple opportunities that may shift in and out of the quarter. There will always be some seasonality in Q1, and we may experience a bit of that, but I am confident about our current pipeline across the bank, credit union, and Helix sectors. While there is some pent-up demand, I believe this demand will sustain us for a while as many decisions were postponed. The push for upgrading technology has come from increased demand for digital channels. We're in a favorable situation right now, and we feel very positive about 2022 and beyond.

Okay. Very helpful. And then, David, as we look at sort of the overall OpEx curve here and maybe even including cost of sales within it, you’ve been making a lot of investments to sort of scale the business, be ready to capture a renewal in demand from the end market. But I guess, where are we in terms of some of those step function investments? And as we see growth reaccelerate, should it potentially provide even more leverage on the margin side? Or would you expect to continue to reinvest any upside that you see relative to your typical EBITDA expansion on an annual basis?

The answer is yes. I mean, we do think, as we see the revenue growth accelerate throughout the second half of this year, you will see some margin expansion. So that’s something that, as to your point, we have been investing in. We feel like we are going to get scale and we are going to get efficiencies. However, we are going to continue to invest in the business as well. But we feel like as we see that accelerated revenue growth, the efficiencies are going to slightly offset some of those investments, and you will see margin expansion in the second half.

All right. Great. Thanks for taking the questions.

Thanks, Matt.

Thanks, Matt.

I would now like to turn the call back over to Matt Flake, CEO to close the call.

Yes. Thank you, and thank you, everybody, for attending today. We certainly are pleased with the results for Q4 and very optimistic about '22 and what's ahead for us. So, thanks, everybody. We will hopefully talk to you during the quarter.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.