Q2 Holdings, Inc. Q1 FY2022 Earnings Call

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings' First Quarter 2022 Financial Results Conference Call. Thank you. I would now like to turn the call over to Josh Yankovich, Investor Relations. Sir, please begin.

Thank you, Operator. Good morning, everyone, and thank you for joining us for our first quarter 2022 conference call. With me on the call today are 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 with respect to 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, copies of which may be found on the Investor Relations section of our website, including our quarterly report on Form 10-Q 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 first quarter results and highlights from across the business. I'll then hand it over to Jonathan to provide more insights into the emerging businesses. David will then discuss our financial results in more detail. In the first quarter, we generated non-GAAP revenue of $134.3 million, up 15% year-over-year, and 1% sequentially. We also added over 500,000 users to our digital banking platform during the quarter, resulting in a year-over-year increase of 8%. That brings us to approximately 19.7 million total registered users. Our Q1 results exemplified many encouraging themes. First, we saw solid execution across our sales teams. We signed two enterprise deals with our loan pricing solutions, as well as four Tier 1 deals across banking and lending. We're pleased with the breadth of deals we continue to win, both in the diversity of institutions choosing Q2 and the variety of products being selected across those deals. Our emerging businesses also had a strong first quarter. Q2 Innovation Studio was cited as the key differentiator in the vast majority of our net new digital banking wins. And we continued to see rapid adoption from our customers and a growing partner ecosystem. With Helix, our banking as a service solution, we continue to win new deals across a broad range of verticals, and we launched an exciting new program with NYDIG, a leading bitcoin provider, all of which Jonathan will discuss in more detail shortly. Our product innovation also continues to be recognized by leading industry analysts. This quarter, IDC named Q2 a leader in their IDC MarketScape for North American digital banking customer experience platforms, referencing the Innovation Studio as a key driver of our ranking. While we were pleased with our sales performance from the quarter, we believe this type of third-party acknowledgment supports our vision and product strategy in the new frontier in financial services, and highlights the hard work of our talented product and engineering teams. With these themes in mind, I'd like to walk through our sales wins for the quarter in more detail. We had another strong quarter in the enterprise and Tier 1 segments with our lending solutions. This is the second quarter in a row with multiple net new enterprise wins, further exemplifying that the demand environment in the enterprise segment has improved, and we're succeeding in converting demand into new customers. One of our enterprise deals in the quarter was with a top-10 U.S. bank. This bank sees our loan pricing tools as a valuable way to enable their commercial bankers with actionable, in-the-moment insights, enhance the efficiency and experience of their staff, and help them better serve their clients. Our technology's ability to seamlessly integrate with other critical systems, like their CRM solution, was a key reason we won the deal. The strength and size of our customer base is significant value to our lending customers and prospects because these solutions use loan data from across our customers to make real-time recommendations to commercial lenders. The more data they have the more effective the pricing engine becomes. As we've said in the past, we have demonstrated an ability to expand our enterprise loan pricing relationships over time. With some of our largest enterprise customers, we've more than doubled the contracted average recurring revenue in the first two years. While landing these enterprise accounts is significant, we believe each one represents a substantial expansion opportunity beyond the initial booking. We now have roughly half of North American banks with over $100 billion in assets using Q2, including the five largest Canadian banks, which are all using our loan pricing capabilities in some capacity. Another one of our Tier 1 deals from the quarter was the cross-sale of our loan origination solution to an existing Tier 1 digital banking customer. This is just another example of the importance of our strategic relationships with our customers, which puts us in a favorable position to cross-sell into other areas of the business. Having recently shifted to an enterprise selling motion in which our sales force is enabled to sell virtually the entire Q2 portfolio, we expect to see more of this expansion activity over time. We also continue to add Tier 1 customers on the digital banking side, signing three net new Tier 1 banks in the quarter. Complementing those Tier 1 wins, we also had a solid quarter in the Tier 2 and 3 segments. Our broad-based success underscores an emerging trend in our digital banking business over the past few quarters. We're signing a wide variety of progressive financial institutions from across the market. Tiers 1 through 3, banking credit unions, retail and commercial that are looking to upgrade to a premium digital banking platform as part of a widespread technology refresh accelerated by the pandemic. To give a better sense of the kinds of financial institutions choosing Q2's digital banking platform, I'd like to share a few specific wins from the quarter. One of the Tier 1 deals we signed was with a, roughly, $10 billion financial institution with a progressive growth strategy centered around their strong fintech partnership business. This is a great example of a bank that's heavily invested in using technology to strategically grow their business. They selected Q2 for both retail and commercial digital banking in the quarter. Given how progressive this bank is, I believe this win is a testament to the strength of our single-platform architecture, our approach to user experience, and the flexibility we provide through Q2 Innovation Studio. Our second Tier 1 win was also unique. As we've shared in recent quarters, our customers frequently tend to be on the acquiring side of M&A transactions, which can benefit Q2 as the acquiring institution typically rolls the acquired entity onto their digital banking technology. However, during the quarter, we had a Tier 1 win emerge from a scenario where an existing customer was acquired by a non-Q2 bank. Rather than the acquiring institution rolling the Q2 customer onto their legacy online banking system, the bank evaluated Q2 and chose to adopt our digital banking platform across the entire combined entity. Given how atypical it is for an acquiring institution to adopt the technology of the acquired bank, I'm really proud of this win. Rather than choosing the path of least resistance and keeping their legacy system, the bank made a strategic long-term investment in our solutions; a strong endorsement of Q2's platform. We also had success in the Tier 2 and 3 segments as we continue to see customers include more Q2 products at the time of their digital banking decision. In fact, the largest digital banking deal from the quarter from a bookings perspective came from a Tier 2 institution that adopted not only digital banking, but also our onboarding, fraud management, and marketing intelligence solutions. Finally, we just crossed the one-year anniversary of our ClickSWITCH acquisition, and the sales performance has been impressive on multiple levels. We have attached ClickSWITCH to a majority of net new digital banking deals over the past year, and we're seeing interest from fintech clients who are looking to leverage ClickSWITCH to drive primacy with their customers. ClickSWITCH has also proven to be a valuable product to help us land new accounts as a standalone solution, particularly in the enterprise space. During the first quarter, we signed a top-25 U.S. bank, along with several Tier 1 ClickSWITCH deals, all important relationships that we will look to expand over time. As the broad mix of deals from the quarter demonstrates, we believe financial institutions are actively looking for opportunities to invest in technology. One area that we have seen as an increasing priority is modernizing the commercial banking experience. Yesterday, we announced Q2 Catalyst, a new solution set comprised of our commercial banking and lending capabilities. With Q2 Catalyst, we're positioning ourselves as a single strategic partner to help financial institutions digitize the commercial banking relationship, from winning and onboarding new clients, to serving and growing those relationships over time. While the products within Q2 Catalyst, like treasury onboarding, loan pricing, and corporate digital banking are already established in the market, we believe taking them to market as a combined solution set with unique integration value will be a powerful differentiator for us in commercial banking and lending. Before I hand the call over to Jonathan to share some updates from our emerging businesses, I want to reiterate how pleased we are with the way we started the year. The demand environment has continued to improve. When you couple that with our robust solution set and broad sales execution across all lines of business, we believe we are still well-positioned for the re-acceleration of revenue growth exiting 2022 and heading into 2023. Thank you. And with that, I'll hand the call over to Jonathan.

Thanks, Matt. I'll start with Q2 Innovation Studio, where we continue to see growing demand from both the partner and customer perspective. We formally launched the Innovation Studio in June of last year, and as of the end of the first quarter, more than half of our digital banking customers are now using Q2 Innovation Studio and at least one of our programs. We already have a growing number of customers utilizing every Innovation Studio program, partnering with fintech solutions via our marketplace programs and building and extending their digital platform with their own resources. This is exciting because we believe the more broadly our financial institutions use Innovation Studio, the closer our relationship becomes, and the greater the long-term revenue opportunity. Q2 Innovation Studio continues to be a key contributing factor in winning net new digital banking deals. More than 80% of net new digital banking deals in the quarter included Innovation Studio. Those financial institutions specifically cited it as a driver in their decision to choose Q2. We also grew the total number of partners by 25% in the quarter. This case of adoption is encouraging, and is validation that our distribution channel is providing a compelling value proposition to this rapidly growing partner ecosystem, and that financial institutions are seeing the value in working with these solutions to drive rapid innovation for their end users and introduce new revenue opportunities. We're building out a revenue share ecosystem that customers are just beginning to benefit from. While we are in the early stages of driving meaningful new economic opportunities for our customers, we believe the ability to create these sources of revenue will strengthen our position as a strategic partner, rather than just a vendor. Moving to Helix, this business also had several key highlights in the quarter. We continue to sign new customers from across a range of different verticals, and landed a new deal with one of our largest customers, effectively extending our partnership and growing the economic opportunity associated with this relationship. We also launched a strategic program with NYDIG, a leading bitcoin company. As we discussed, when we won this deal in the second quarter of 2021, NYDIG is leveraging our Helix platform to power their new payroll offering called the Bitcoin Savings Plan, a benefit program offered through U.S. employers. Bitcoin Savings Plan enables employees of participating companies to auto-convert a portion of their paycheck into bitcoin with no transaction fees. The program is off to an exciting start with employers from a wide range of industries. Given NYDIG's unique go-to-market model, in which they partner with employers and the simplicity of the user experience, we are optimistic about the potential of this relationship to grow substantially over time. As we communicated in the past, we consider this program launch an important milestone in unlocking the value of Helix client relationships. Our Helix solutions typically have an upside minimum with significant potential for long-term revenue acceleration related to user growth and adoption following a program launch. One quarter into 2022, I'm excited about the year ahead for Helix, for signing new clients and entering new verticals, extending existing relationships, and launching major client programs. With the state of our pipeline, and a marketing lift from our recent rebrand, I believe we are entering the remainder of the year with great momentum. Thank you. And with that, I would like to pass the call over to David to discuss our financials.

Thanks, Jonathan. In the first quarter of 2022, we built on the momentum that began in the second-half of last year, with strong demand, revenue that exceeded the high-end of our guidance, and EBITDA that fell within our guidance range. I'll begin by reviewing our results for the quarter, and conclude with updated guidance for the second quarter and full-year 2022. Total non-GAAP revenue for the first quarter was $134.3 million, an increase of 15% year-over-year and up 1% sequentially. The year-over-year growth for the quarter was driven by an increase in subscription revenue, resulting from new customer go-lives and organic user growth. The sequential increase was also driven by new customer go-lives within our digital lending space, as well as an increase in service-based revenue. The overachievement of revenue relative to guidance was primarily generated by our Helix solutions. Transactional revenue represented 13% of total revenue for the quarter, down from 14% in the prior year period, and consistent with the previous quarter. Transactional revenue dollars in total had a slight sequential decline due to a slowdown in traditional bill pay volume during the quarter. Annualized recurring revenue or ARR grew to $594.2 million, up 20% year-over-year and 3% sequentially. The year-over-year growth and sequential growth was primarily from net new bookings and cross sales. In addition, the sequential growth in the quarter also benefited from increased usage-based revenue from our Helix solutions, driven by growth in users and transactions. As we previously mentioned, some of our Helix customers have exhibited seasonally larger increases in usage-based revenue related to tax season. We ended the quarter with approximately $1.4 billion in backlog, an 8% increase year-over-year, and a sequential decline of approximately $18 million. The year-over-year increase in backlog was largely a result of bookings added through the net new bookings as well as renewal opportunities with existing customers, both concentrated in the second-half of 2021. As I mentioned in last quarter's earnings call, Q1 had far fewer in-target renewal opportunities, which impacted our sequential backlog growth. In-target renewal opportunities will remain lower in the second quarter before improving in the second-half of the year. As a result of the strong sales performance observed during the quarter, as well as the pipeline for the remainder of the year, we continue to believe we will have strong year-over-year backlog growth for the full-year of 2022. As we previously mentioned, we feel ARR is an important key performance indicator, which provides a bolometer for bookings within a given quarter, in addition to reflecting the run rate for our usage-based revenue, which will be important to consider as the revenue mix of our business evolves. Both ARR and backlog have limitations as forward-looking indicators due to booking seasonality, the timing of renewals, and backlog recognition being limited to contractual commitments; we believe these indicators, when used in conjunction with our commentary on bookings and new wins, illustrate a more holistic picture of the business demand we are observing, and provides support for our long-term financial model. Gross margin for the first quarter was 51.4%, down from 52.6% in the first quarter of 2021, and down slightly from 51.5% in the previous quarter. The year-over-year decline in gross margin was primarily due to incremental delivery resources associated with several previous strong quarters of net new wins across the business. The sequential decline in gross margin was attributable to an increase in employee-related expenses, including incremental hiring costs and benefits, as well as an increased mix of lower-margin pass-through revenue. Over time, we continue to believe that the mix of Helix usage-based revenue will shift towards margin-accretive revenue opportunities. Total operating expenses for the first quarter were $65.7 million, or 48.9% of revenue, compared to $54.9 million, or 46.9% of revenue in the first quarter of 2021, and $61.5 million, or 46.5% of revenue in the fourth quarter of 2021. The year-over-year increase was predominantly driven by increased headcount, rising people costs, marketing expenses associated with stadium naming rights, and the expenses associated with our Austin-based facility opened in the second quarter of last year. The sequential increase in operating expenses as a percent of revenue was driven primarily by additional headcount, which was concentrated within R&D and sales and marketing, also a seasonal ramp in payroll taxes, and an increase in hiring costs and benefits. Adjusted EBITDA was $8.1 million, down from $9.9 million in the first quarter of 2021, and $10.8 million in the previous quarter. In total, we incurred approximately $1.5 million of expenses in the quarter, above our expectations related to benefits and one-time hiring fees. About 40% of that overage was incurred within the cost of sales, with the remaining portion within operating expenses. The increased cost associated with benefits were related to a rise in medical claims, which we saw increase significantly both sequentially and year-over-year. Hiring fees were predominantly associated with an accelerated pace of hiring for critical resources intended to position our business to drive accelerated growth in the back-half of the year and into 2023. We ended the quarter with cash, cash equivalents, and investments of $413.7 million, down from $427.7 million at the end of the fourth quarter. Cash used in operations for the first quarter was $4.6 million, driven largely by the timing of our annual bonus payout and an incremental payroll run during the quarter that specifically resulted in approximately an $8 million incremental impact to cash. In addition, we incurred net capital expenditures of $3.9 million and generated negative free cash flow in the quarter of $12.8 million. Let me wrap up by sharing our second quarter and updated full-year guidance. We forecast second quarter non-GAAP revenue in the range of $139.5 million to $141 million. We are raising our full-year non-GAAP revenue guide to the range of $577.5 million to $581.5 million, representing year-over-year growth of 15% to 16%. As we previously mentioned, we believe our year-over-year revenue growth rates exiting 2022 will be higher than those observed in the first half of the year, and remain confident that we will be positioned for annual revenue growth rate expansion in 2023. We forecast second quarter adjusted EBITDA of $7.4 million to $8.9 million, and full year 2022 adjusted EBITDA of $41.4 million to $44.4 million, representing 7% to 8% of non-GAAP revenue for the year. The adjusted EBITDA we're forecasting in the second quarter reflects continued higher costs associated with an increased pace of hiring new employees and a ramp in T&E. We expect the acceleration of revenue in the second half of '22 contemplated by our guidance will coincide with margin expansion. In summary, we had a solid start to the year, and believe we've positioned ourselves well to deliver on accelerated revenue growth in the second half of the year, and into 2023, with an expanding margin profile. With that, I'll turn the call back over to Matt for his closing remarks.

Thanks, David. In closing, I'm pleased with our performance across the business in the first quarter, where we had substantial traction and broad-based execution. We saw ongoing success in the enterprise space as our loan pricing solutions help us move upmarket, and continue to add some of the world's biggest banks to our client roster, which in turn produces substantial data that goes back into our solutions, helping financial institutions of all sizes make better, more profitable loans. On the digital banking side, we had a diverse mix of wins, both in landing new customers and expanding existing relationships, highlighted by three Tier 1 net new wins that adopted a broad set of products. Our emerging businesses also had a strong quarter. With Helix, we continued to add customers from various verticals, and launched a new program with NYDIG, which we expect to grow substantially over time. We're beginning to see the flywheel effect with Q2 Innovation Studio. It's attracting world-class fintech partners, helping us win net new deals, and driving deeper engagement with our customers. While it’s still early innings from a revenue perspective, we believe the recent traction demonstrates the long-term opportunity Innovation Studio can bring to our business. We're pleased with our broad-based execution, and believe it demonstrates why we're uniquely positioned to facilitate the new frontier in financial services by partnering with leading banks, credit unions, fintechs, and brands. Thank you. And with that, I'll turn it over to the operator for questions.

Thank you. Our first question comes from Alex Sklar from Raymond James. Please go ahead, your line is open.

Great, thanks. Matt, you've been moving upmarket for a while now, probably since the time of the IPO. But the Tier 1 and the enterprise activity seems to have accelerated over the past few quarters. I'm curious, are you seeing any changes in terms of what you're displacing in the market, and how that compares across your digital banking and lending offerings? Thanks.

Yes, thanks, Alex. Yes, we've continued to have great momentum upmarket, $5 billion and above; I think we've got more than 65 digital banking customers of that size, and also more than 40 digital lending customers. To some extent, they put the brakes on harder during the pandemic earlier, and then they had to fire it back up in '21. The decision-making in that area has come back to life, obviously. I think we've got three straight quarters of enterprise deals with PrecisionLender, and digital banking, obviously, a couple straight quarters with Tier 1s. I think it's more a matter of, as they come out of the pandemic, the importance of digitizing their business is at the top of the list for them right now, and that's where you're seeing this activity. Our solution set matches up very nicely with what they're trying to do. Our customer base is able to reference off other customers that are similar sizes and shapes to them. There's a network effect that occurs. The expansion opportunities within these customers are tremendous, whether it's for lending or digital banking. We're hitting on all cylinders in those areas, and I look forward to a big second quarter in the back half of the year. I think you'll probably see digital lending on the enterprise side catch its breath, but the back half of the year should be a good year for them. I'm really encouraged by what we're seeing upmarket. But also, I’d highlight that we had two Tier 2 deals that were of the size, if not bigger from an MRR perspective on digital banking than some of the Tier 1s. What’s happening is you have a sales force that's out talking about digital transformation now, not just point solutions. That's leading itself to larger deals at these banks that are below $5 billion because they can make a bigger decision; you're not just focused on the line of business. You'll begin to see that translate upmarket as well. We’ll see ASPs continue to increase as well. Just really solid performance coming out of the pandemic. We have obviously some bigger economic issues, but I feel really good about where we are in the pipeline, upmarket as well as in Tier 2 and Tier 3.

Got it. That's great color. And just a quick follow-up for David, based on the 20% ARR growth we've seen over the past two quarters, it sounds like you've expressed some comfort in acceleration in the back half of '22. I'm curious how you feel in terms of comfort level on the acceleration going into 2023?

Yes, Alex, we still feel good relative to what we disclosed, both at Investor Day, and then repeated again at the start of the year, in terms of the acceleration. One of the things we've talked about is the size of some of the opportunities we're winning. Over the last six months, we've won nine Tier 1 opportunities and seven enterprise opportunities. All of that is fantastic, and we're excited to see that manifest into the P&L. But keep in mind, that's going to be late-year stuff because it takes longer to implement those solutions. So, you're going to start to see that ramp really occur end of Q3, into Q4, and then that acceleration that we've been talking about in FY '23.

Okay, great. Thank you, all.

Our next question comes from Terry Tillman from Truist Securities. Please go ahead, your line is open.

Great. Morning, everyone. This is Robert on for Terry. Thanks for taking the questions. My first one is on Helix. So, at this point, there's been a lot of programs launched, and a lot of customers; any that stand out or any becoming more material? And could we get an update again on the long-term growth trajectory in banking as a service over the next three to five years, has visibility changed, improved, or about the same? And then I had one follow-up. Thanks.

Yes, I can take the first one, it's Jonathan, on Helix. I think we've talked about some of the clients that we've launched. We're a little sensitive about what we share on a name-by-name basis. We've seen things like tax season and just the proliferation of multiple accounts held by these end-users lead to big opportunities to engage with these users and see them transact with things like debit cards and credit. We have multiple clients that we're excited about what we've seen in the first and second quarter so far, largely driven by events like tax season and other big marketing sprints that they do to engage with these users, and often they're offering meaningful incentives. There's been a host of names that we're excited about. We talked about the one we are launching now from a bitcoin payroll perspective, and I think that's a very innovative opportunity with U.S. employers. We're excited to work on that with the NYDIG team. Lots of big opportunities. We shared at Investor Day, we believe that this is going to be a highly accretive business to our overall growth rate as a company, and we think we shared something north of $100 million as the long-range target, leading into 2026.

Yes, that's right. Robert, one of the things we're looking at is how to model out this business because it is a little bit more unique in terms of the economic models that drive it. But we certainly feel comfortable based upon the transactional volumes that we're seeing associated with these because there are lower required minimums that occur with these. They mean lower recurring revenue but they start to ramp pretty quickly. We’re modeling that out and feel really good about how we're positioned for that accelerated growth. As Jonathan said, it's going to be an accretive growth rate over the next few years to our overall business.

That's great, appreciate the color. Just had one quick follow-up on Catalyst, how meaningful could Catalyst end up being? Could that move the needle in more Tier 2 or Tier 3 growth or too early to tell at this point? Thanks.

Yes, thanks for the question. We are obviously extremely excited about Q2 Catalyst. It's a unique offering that allows our customers to work to digitize the business process of both pricing a relationship, pricing treasury services, and then helping sell the customer on the technology with tailored demos, onboarding the customer, which is a real challenge when you sign somebody up to become a new borrower or depositor at your bank. It doesn't have a specific tier; you could be a Tier 1, a Tier 2, a Tier 3 financial institution, but Q2 Catalyst for us is highly differentiated. I got reports recently from several folks that were out talking with large Tier 1 customers who said that they want this as soon as they can get their hands on it. So, it's a game changer for us and the marketplace. There's a lot of work from the product teams that has gone into it, and it's the culmination of a lot of the assets we've built and acquired over the last three to four years, with PrecisionLender, cloud lending, digital banking growth. We're really excited about it. I think it is going to be a real game changer for us. I'm really proud of the work that's come out of this, and I think no matter what bank or credit union you are, this fulfills our mission of helping our customers build their business and strengthen their communities.

That's excellent. Thanks so much.

Our next question comes from Andrew Schmidt from Citibank. Please go ahead. Your line is open.

Hey, guys. Thanks for taking my questions and great to see the continued step up in demand. On that point, I was hoping you could talk maybe a little bit about your conversations with financial institutions. Obviously, there are a few puts and takes in terms of just health this year—obviously more geopolitical uncertainty, interest rates going up maybe a positive, but obviously impacting mortgage volumes. Just curious overall, you know, what you are hearing from FIs from a health perspective? That's the starting point. Thanks a lot.

Yes, thanks, Andrew. Interest rates are going up, but it hasn't really hit the consumer or the small business or the business lending out there. Obviously, mortgage has taken a hit, but the trade-off is what's going to happen with the economy, and I'm not going to opine on that. If you think about our solution set, our PrecisionLender tool, I talked to the President of a really large bank here in Texas, and he told me that 40% of the lenders of the bank have never written a loan in a rising rate environment. You need a tool to help you price a loan in that situation. That's where PrecisionLender comes into play. The volumes that we are seeing on digital, I think we had more than a billion logins on our digital application in the first quarter. The amount of volume that these systems were seeing is unprecedented, and we are at the center of those transactions. In a tough economic environment, if that is what is ahead, digital is going to make them more efficient, it's going to drive profitability, and allow them to serve their customers in ways that they may not be able to do it with people. We are at the center of this right now, and the opportunities and the conversations we are having with people want products like Q2 Catalyst, they want products like PrecisionLender to simplify their live ClickSWITCH, allowing people to move an account and bring their direct deposit with them—all these things are top of mind, and our solution set aligns really well with the customer's needs. Jonathan talked about the momentum on the Helix side of the business. Who knows what's going to happen, but I think we are going to be in a really good position on either side of that trade.

Thanks for that, Matt. That's a great point about loan pricing solutions. Thank you for that. In terms of just the cost and inflation in our environment, David, I think you called out a few impacts in the quarter—hiring fees, benefits, etc. It looks like you are able to largely offset that for the year, so maybe talk about what the offsets are, and then obviously there's still moving targets about your ability to manage potential ongoing cost inflation and retention.

Yes, sure, Andrew. The way that I categorized this is sort of those that we know and those that we don't know. For those that we know, we are fairly confident that we'll continue to see increased hiring costs coming into Q2 and Q3; we factor that into our guidance for the quarter and for the full year. We're actually feeling good about our ability to hire and get resources. We have a lot of larger opportunities going live later in the year. Then there are the unknowns—unknowns will be things like benefits. We did see a spike in Q1, and one of the things that we've done in our guidance and for our full-year modeling is we've taken it up on a per employee per month basis and adjusted accordingly. There will also be other things that we know, like T&E; we expect that to ramp up based on the reopening. We saw a ramp up in travel in March, and we expect to continue seeing that in Q2 and then going forward for the rest of the year. All of those right are incorporated. To your point, we are always working on areas of efficiency to try to offset that across the organization, and we feel good about the offsetting measures that we have in place to allow us to deliver the full-year EBITDA that we provided in the guidance.

Got it. Thank you very much, David, appreciate the comments.

Our next question comes from Parker Lane from Stifel. Please go ahead, your line is open.

Yes, hi. Thanks for taking the question, and congrats on the quarter. Just wanted to circle back on field efficiency, in particular, what impact has the launch of Q2 Catalyst and the ability of the whole team to solve the expensive portfolio had until the efficiency recently and how does that scale over the next few years as more and more of the team goes out with the fullback?

Yes. A lot of reports had been launched Q2 Catalyst yesterday, but we've been talking about it with customers. I think we landed in partnership with our customers, trying to solve the problems they're facing, whether it's onboarding, winning the deal initially, onboarding it, or serving and growing with them. It’s going to have tremendous impact and lift in the deals out there right now. It's going to help us close them and generate more leads moving forward. From a deal efficiency perspective, everything is trending in the right direction for us. The enterprise selling motion we launched puts us in a position to go back to existing customers, with hundreds of digital banking and digital lending customers, and expand our product offerings. That will continue to fuel the growth of this business for a long term. On the net new side, our products, the surface area of the digital transformation we are pitching to people with proof points around how we can do it are differentiated. Continuing to invest in that group and train them will be great.

Got it, makes sense. And then, from an inflation perspective, in your last quarter you sort of called out a potential slowdown there because of the strong bookings in the back half of the year. Is that playing out in real-time? And how is that being impacted by the macro backdrop and current labor condition?

Yes, Parker, I think you are talking about the—in the fourth quarter we had fewer go-lives; I think you are going to begin to see a pick-up in go-lives in the back half of the year from the five quarters of pandemic bookings. Maybe there was a little miscommunication there, but we see that we put 500,000 end users on digital banking, saw a lot of growth in banking lending, and obviously, Helix is up to a million accounts. Everything is coming together; we just need to work through the snakes from the pandemic bookings five quarters. By the back half of this year, we should see the momentum continue to carry us into '23.

Got it. Thanks for the feedback.

Our next question comes from Pete Heckmann from D.A. Davidson. Please go ahead, your line is open.

Hey, good morning. One quick one on transactional revenue; can you give us a little bit more idea in terms of the breakdown there—traditional bank aggregated bill pay versus different types of transactional revenue, whether that be direct bill pay or some of the things coming from Helix, and how those growth rates differ between the two?

Yes, hi, Pete. Yes, the majority of the transaction is still bill pay. Bill pay did decline year-over-year, which is why you saw it remain at 13%. Then you have other drivers in business heading there from a transactional standpoint, and there is some pass-through transactional revenue hitting the services and other line items as well. When you see suppressed margins in that space, which you do in the filings, that's the biggest driver there is that the pass-through transactional revenue hits in other services in the filing.

Okay, all right. And then just in terms of the bank M&A, I think you had given some updates in the past, but in terms of the M&A that has happened over the past 18 months, do you feel like you are coming out on top in most of these mergers?

Yes, the Q1 numbers, I don't know; David, do you have a description? It was 20 or 21, we were on the acquiring side.

That's right.

The numbers of our customers that are doing the M&A are significant. We had approximately 116 acquisitions in '21 and 104 in '22, where we were the acquirer or part of an M&A. This momentum continues in Q1, which I think reflects our client roster and their approach towards growth. We hope that trend continues, and I don't see any reason why it wouldn't.

Great. Good year, thanks.

Our next question comes from Joe Vruwink from Baird. Please go ahead, your line is open.

Great. Good morning, everyone. I wanted to go back to commercial solutions broadly; obviously, talking about Catalyst a lot on the call, but can you talk about just the broader investment environment, and how is the priority for banks? It seems like based on what we hear, there is more of a renewed focus in investment plans looking into FY'23; are you seeing that show up in your pipeline? How does Q2 stand up from a competitive sense?

Yes, I don't want to take away from retail or the Helix business, but we see solid momentum with the credit unions looking to get into business lending, operating accounts, and commercial banks focusing on commercial business. They have seen the value of digitizing the commercial experience—they just don’t have the solutions to compete with larger institutions. We are bringing a solution that is broader, pricing perspective, onboarding, unifying the experience. Our customers see the strength in our technology across their operations, which drives significant value from transactions to improved efficiencies. We're in a unique position because of the decisions we've made around investments in technology, which differentiate us against competitors. You're starting to see that momentum translate into the back-half of 2022, and beyond.

Okay, that's great. And then, again, not to put you on the spot with a macro look, but clearly a concern out there, particularly with the regional banks. Maybe do for a bit of economic slowing? I guess, does that square with the things you're bringing up? Maybe the fact that Tier 2, Tier 3 banks were slower to come back, now they're transacting with Q2 in a sizable way. Is that any indication or leading indicator of what is expected into next year?

I want to clear that up. The Tier 1s were the ones that came offline the fastest, and it took them longer to get back on. The Tier 2 and Tier 3 organizations came back to life faster, and they are smaller organizations that can get approvals quicker. The Tier 1 opportunities have been opening up, and the importance of digitizing banking and lending remains critical. Whether it's retail, small business, or commercial, we believe we're well-positioned for growth regardless of economic conditions. Our proven solutions and user volume—almost 20 million users on our application—are pivotal in driving demand. We’ll continue to pursue opportunities aligned with our mission of digitizing banking experiences.

Okay, thanks for the clarification, Matt. I'll leave it there.

Our next question comes from Matt VanVliet from BTIG. Please go ahead, your line is open.

Hey, good morning, guys. Thanks for taking the question. Matt, you might have touched on a little bit of this, but maybe I'll get Jonathan to pontificate around it. As you look at what you've built out between the Innovation Studio and kind of the more inclusive Helix group, are you starting to see more conversations with existing banks about launching newer products or digital-only interfaces, things of that nature? Can you take this whole pre-built platform to those guys, or are they doing some of that stuff internally, and this really is more of a fintech-type, singular focus?

Yes, Matt, I'll let Jonathan discuss this with you.

Yes, it's a very timely point because we are starting to see more and more conversations with our existing digital banking clients regarding this concept of a digital-only initiative. It's an interesting opportunity, and there's a lot of awareness of the strategic value of a cloud-based core and its cost advantages and speed advantages. Historically, it’s been challenging for banks to understand the differentiation between traditional cores and what cloud-based next-gen cores offer. We're working through that now, but we think it's going to open up a new market more towards the back of this year and into 2023. It's a good question because it's coming up now in a way that it wasn't six, 12 months ago.

Very clear. And then, Matt, you mentioned a few of the large banks in Canada, but curious in terms of the international markets maybe outside of the U.S. and Canada. How are the lending solutions being sold there? How are they being presented? What's the traction been like? Are the buying patterns or decisions or overall outlook any different than what you're seeing from some of the larger North American-based customers looking at those products as well? Thanks.

On Canada, just to clarify, the top-five banks all use our pricing tool in some form or fashion, so we've done really well in Canada. Europe is opening up with a little hiccup based on the war. Asia is picking back up again. Australia just raised rates again. You'll see similar dynamics. The opportunity internationally from a pricing perspective comes from large global banks beginning to use the tools globally. We’re hopeful the international business will pick up in the back half of this year. We’ve been patient, and we'll continue to invest in that group.

Alright, great. Thank you, very helpful.

Our next question comes from James Faucette from Morgan Stanley. Please go ahead, your line is open.

Hi, thanks for taking my question. It's Michael on for James. I just wanted to quickly touch on some of the earlier comments that were made related to the conversations that you've been having with various FIs. In general, who is most likely to lean in in this environment? Are you seeing any notable takeaways in terms of bank and credit union size, in terms of customer acquisition or who is trying to reengineer their tech stack?

Michael, if you look at our solutions and who we've gotten, the law of attraction within this business shows that if management teams of banks are focused on growing not only within their customer base but also through winning new deals in the marketplace, we end up winning significantly. We lean towards the financial institutions that use technology as a weapon, not a shield. Those are the customers that we will win the most from, and over the next few years, you'll see those in the $1 billion to $5 billion range become $5 million to $10 billion banks. The idea here is digital tools drive growth regardless of the economic backdrop.

Very helpful. And then Jonathan, I think last quarter you mentioned the number of net new deals citing Innovation Studio was closer to 30% from memory. It seems to have really inflected here to upwards of 80%. Can you dig into the biggest factors driving that inflection? It seems to be a significant differentiator in some ERFB activity.

We're seeing it more than ever as a differentiating factor in new conversations with digital banking prospects. The ability to bring small business applications beyond just what the bank offers exposes more value immediately. This has added depth to our value proposition throughout our sales cycle. More than 80% of net new digital banking deals in the quarter included Innovation Studio, and those specifically cited it as a primary driver in their decision to choose Q2. We're seeing growth in our partner ecosystem, and over 50% of our customers are now utilizing at least one program.

Very helpful. Thanks everyone.

Our last question will come from Charles Nabhan from Stephens. Please go ahead, your line is open.

Hi, good morning, and thank you for taking my question. I wanted to get your comments on some further comments on your implementation capabilities. Specifically, you've made some investments in the past year. You obviously have ramp up and go-lives coming up, but just curious where you stand in terms of those investments given the demand you are expecting over the next couple of years? And secondly, given the uptick in go-lives expected in the second half of the year, could we anticipate a higher concentration of professional services revenue as a headwind to the margins?

Charles, we did invest implementation resources as we started to book some of those opportunities in the second half of last year, and that continues to ramp. We have a strong pipeline and a solid Q1 that leads to more implementations not only at the end of this year but also into 2023. We’re utilizing our current resources and adding new resources to ensure that we're hitting on-time deliveries for our customers. Regarding the go-lives, you're deferring most of the service costs incurred during that time until we go live, starting to recognize that over the life of the deal. I would not anticipate seeing an adverse amount of implementation costs related to the license fees. However, we also talked about premier services as a large mix of the business during our Investor Day back in December. That is something you are starting to see in Q1 and will continue to see for the rest of the year. It's very sticky business for us and strategically important for our customer base.

Got it. I appreciate the color. Thank you.

Sure, Charles.

We have no further questions. I would like to turn the call back over to the presenters for any closing remarks.

Thank you, Operator. Thank you everybody for attending today. We are obviously encouraged by what we have seen over the last couple of quarters and are very optimistic about the back half of this year. Thanks everybody for attending. We will talk to you for the rest of the quarter. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.