Good afternoon. My name is Brent, and I will be your conference operator today. I would like to welcome everyone to the Q2 Holdings Second Quarter 2023 Financial Results Conference Call. I would now like to turn the call over to Josh Yankovich, Investor Relations. Sir, please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our second quarter 2023 conference call. With me on the call today are Matt Flake, our CEO; David Mehok, our CFO; Jonathan Price, our Executive Vice President of Strategy and Emerging Businesses; and Kirk Coleman, our President, who will join us for the Q&A portion of our call. 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 and for the financial services industry. Actual results may differ materially from those contemplated by these forward-looking statements, and we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our periodic reports filed with the SEC, copies of which may be found on the Investor Relations section of our website, including our quarterly report on Form 10-Q filed today and subsequent filings, and the press release distributed this afternoon regarding the financial results we will discuss today. Forward-looking statements that we make on this call are based on assumptions only as of the date discussed. Investors should not assume that these statements will remain operative at a later time, and we undertake no obligation to update any such forward-looking statements discussed in this call. Also, unless otherwise stated, all financial measures discussed on this call will be on a non-GAAP basis. 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 this afternoon. We have also published additional materials related to today's results on our Investor Relations website. And finally, before we begin, we'd like to remind everyone that our annual ESG report was released last month and is also accessible on our website. Let me now turn the call over to Matt.

Thanks, Josh. I'll start today's call by sharing our second quarter results and highlights from across the business. I'll then hand it over to Jonathan to provide more insights into the emerging businesses organization he oversees. David will then discuss our financial results and guidance in more detail. Since August of last year, we've been laser-focused on managing our business towards profitable growth, and our financial results demonstrate that we're executing on that strategy. In the second quarter, we generated non-GAAP revenue of $154.6 million, up 10% year-over-year. We saw continued strength in subscription revenue, which was up 15% year-over-year, and we had another quarter of strong profitability results as well, with adjusted EBITDA of $17.6 million or 11% of revenue. We're especially pleased with our ability to prudently manage costs in recent quarters, which is reflected in our approximately 450 basis point expansion in adjusted EBITDA margin over the past year. We had another solid bookings performance in the second quarter, resulting in the best first half of bookings in company history. Year-to-date, we've continued to see a few specific trends in our sales performance regarding the types of deals we're winning, their magnitude, and their impact on the business. First, our average sales price has seen a meaningful increase as our deals have become more comprehensive, and we continue to move up market. Our ASP has grown by approximately 30% over the past year. This expansion has been driven largely by our commercial solutions, which were front and center in the majority of our net new deals in the first half of the year. We also continue to see a broader adoption of products from across our portfolio. As a result of the expansion in ASP, many of our Tier 2 deals from the first half had an initial bookings impact similar to our historical Tier 1 deals. For example, our largest deal from the second quarter was with a $3 billion credit union. The second trend I'd highlight is that we're competing extremely well, as demonstrated by a win rate of over 50% for the first half of the year. Our win rates spanned a broad mix of both retail and commercial deals, reinforcing why we believe we're uniquely positioned in the digital banking landscape. Q2 Innovation Studio has become a significant differentiator in virtually every digital banking opportunity. It continues to be cited as a key driver in the majority of our digital banking wins from the first half and was included in every single digital banking win in the second quarter, whether retail or commercial. On the commercial side, more specifically, we're winning and moving up market with a comprehensive feature set that's wrapped in a modern, mobile-enabled user experience. In the second quarter, this approach to commercial earned us recognition as the Best-in-Class Leader in the 2023 Cash Management Technology Providers Vendor Assessment by Aite-Novarica. We're proud to be recognized by such a prominent source in the industry and believe this recognition validates our leadership position in commercial digital banking and will continue to contribute to our momentum in the market. When we started this company, our first line of code included business functionality. And over the last decade, we've made substantial investments in broadening our commercial solutions to support larger, more complex businesses. It's hard, time-intensive work building the unique integrations and conversion experience required to operate and win in the commercial space. And I'm proud to see it paying off for Q2, and more importantly, for our commercial customers, as they navigate the heightened pressure to acquire and retain deposits. So despite some of the disruptions in our end market in the first half of the year, we're encouraged by the strength of the demand environment, the rate at which we're winning deals, and the continued adoption of a broad set of our solutions. And even with our ongoing booking strength over the last several quarters, we believe our pipeline remains strong, a great signal for the demand environment and our opportunity in the second half of the year. Focusing in on the second quarter specifically, we landed a solid mix of deals, including two Tier 1 digital banking wins, one net new relationship pricing deal with a Tier 1 institution and an expansion with a top 100 U.S. bank also using our relationship pricing solutions. The expansion is particularly noteworthy because it came from our existing relationship with the financial institution that was recently acquired by a large bank holding company. This deal extends our initial agreement and over time can lead to additional opportunities to increase adoption across the holding company. Both the net new and expansion deals were competitive scenarios where our relationship pricing tools were selected as the solutions of choice by the customer, and the loan and relationship pricing activity from the quarter gives us momentum entering the back half of the year. Another major highlight from the quarter was our annual client conference, CONNECT, which we hosted in person for the first time since the pandemic began. We saw record attendance at the event with more than 1,000 attendees from customers, prospects, and partners. The overall customer sentiment at CONNECT was extremely positive, and there were a few key themes from our conversations I'd like to highlight. First, attracting, retaining, and growing deposits was top of mind for customers this year given what's happened in the banking industry. It's clear they believe digital banking is critical to their deposit strategies, and we have a broad set of solutions designed to help them succeed across the retail and commercial aspects of their business. Second, there was a lot of buzz about AI at CONNECT, including large language models and machine learning. Coming out of the conference, we believe our customers share our excitement for the potential of these capabilities and that they view us as a trusted partner in this space. With almost 22 million end users, 5.1 billion annual logins, and over $1 trillion in loans supported by our solutions, we have one of the most comprehensive data sets in financial services. We've been using this data to power artificial intelligence and machine learning solutions for almost 15 years. Today, we offer data-driven products that help our customers prevent fraud, target and cross-sell to their account holders, and personalize the digital banking experience. Because of this, we have deep domain expertise in AI, and we've established a framework that's enabling our internal teams to utilize new AI tools. We're prepared for things to evolve quickly in this area, and we're excited to leverage our leadership position to expand our use of AI, both for our customers and to drive efficiencies within the business. The final theme I'd highlight from CONNECT was the energy around Q2 Innovation Studio, which drove a lot of engagement at the event. Thanks to our partner ecosystem model, we had over 150 partner attendees at CONNECT. And many customers shared stories on stage about some of the outcomes they're driving with Q2 Innovation Studio, such as launching new solutions in just a few weeks, achieving more than $1 million in combined fees and cost savings, and reducing call volumes by over 70% with a virtual chatbot, just to name a few. Based on the buzz around Q2 Innovation Studio, it's easy to see why it's playing a key role in our high win rates the last several quarters, and we're excited to see more financial institutions to fintech partnerships coming out of the event. In conclusion, CONNECT '23 was our biggest and best conference yet, and our customers' commitment to digital was on full display. They're highly engaged, excited about our roadmap, and they want to do more in the digital channel. This energy has contributed to the momentum we believe we're bringing into the back half of the year across our business with the existing customers, key prospects, and fintech partners. With that, let me hand the call over to Jonathan to cover a few key highlights from our emerging businesses.

Thanks, Matt. I'm pleased with the role Q2 Innovation Studio continues to play in the success of our business. Since last year, the number of fintech solutions deployed by our customers, as well as the number of end users utilizing them, has more than doubled. Through this flywheel effect, we're executing on our vision for Q2 Innovation Studio, and we're confident it will continue to differentiate us in the market. In fact, Q2 Innovation Studio was cited as a key reason for selecting Q2 in 100% of our net new digital banking deals from the second quarter. While we've previously reported that it has contributed to the majority of our deals in past quarters, this is the first time it's been a key driver in every single one. Q2 Innovation Studio even played a role in one of our wins on the Helix side in the quarter, which I'll move over to now. Helix saw solid activity in the second quarter, highlighted by a significant win with a market-leading insurance provider and the addition of a Tier 1 institution, Five Star Bank, as a bank of record. Our initial relationship with Five Star began on the digital banking side. After their positive experience with Q2 and the Innovation Studio, the bank determined they could expand their deposit strategy through partnering with Helix. As a bank of record, Five Star will provide the depository infrastructure for brands and fintechs that use the Helix platform to offer checking and savings accounts to their customers, a key component of our Helix offering. As deposit growth and retention remain top priorities for our customers, bank of record partnerships like this are a unique way for financial institutions to generate additional deposits outside of their existing customer base. During the quarter, we also landed a net new deal with one of the largest insurance providers in the nation. With this deal, Helix will help the company roll out a unique deposit account offering, which will embed our solution across multiple insurance products within the company, helping them drive deeper engagement across their products and greater value for their customers. In a highly competitive selection process, the company ultimately chose Helix because we offer a cloud-based, real-time core that gives them the personalization, flexibility, and granular control to design and manage a unique product for each of their users' needs, and because of our proven ability to support major clients like this at scale. Thank you. And with that, I'll hand the call over to David to discuss our financials.

Thanks, Jonathan. Our second quarter results continue to demonstrate the demand environment remains favorable, and we're focused on executing on driving growth with enhanced profitability. For the quarter, non-GAAP revenue came in near the top end of our guidance range, and adjusted EBITDA exceeded the high end of our guidance. As Matt mentioned, we've increased our adjusted EBITDA margins by approximately 450 basis points over the past 4 quarters, and we continue to see strength in bookings associated with our higher-margin subscription business, which is reflected in our ARR. With that, I'll begin by reviewing our results and conclude with updated guidance for the third quarter and full year 2023. Total non-GAAP revenue for the second quarter was $154.6 million, an increase of 10% year-over-year and 1% sequentially. The year-over-year increase was driven by growth in subscription-based revenue, which was up 15%. The year-over-year subscription revenue growth was driven by a mix of the deployment of net new digital banking and loan relationship pricing customers, as well as cross-sold products. In addition, we've seen continued strong growth from our risk and fraud solutions. Our subscription revenue for the quarter was 75% of total revenue, aligned with the previous quarter, and up from 72% of total revenue in the prior year. The continued strength in subscription revenue reflects the start of some of the go-lives associated with the strong bookings from our core solutions we saw in the second half of last year. Transactional revenue represented 11% of total revenue for the quarter, down from the prior year period of 13% and consistent with the previous quarter. The year-over-year decline in transactional revenue is a result of the trends we started to observe last year, including continued secular slowing of bill pay as well as reduced growth in Helix-based transactional revenue. During the quarter, we added more than 200,000 users to our digital banking platform, ending the quarter with approximately 21.7 million registered users, an increase of 8% year-over-year. The year-over-year and sequential increase was largely driven by organic user growth. Annualized recurring revenue, or ARR, grew to $681.2 million, up 11% year-over-year. Our subscription ARR growth for the quarter was 16% year-over-year, driven largely by net new deals within our digital banking business and continued expansion with existing customers. We expect subscription ARR growth will be at a premium to total ARR growth for the remainder of the year. We ended the quarter with total backlog of over $1.5 billion. This represents year-over-year growth of 12% and is down marginally compared to last quarter by $1 million. The year-over-year increase was attributable to strength in net new bookings, particularly within digital banking over the past 12 months. As we've mentioned previously, the sequential change in backlog may fluctuate quarter-to-quarter based on the number of renewal opportunities available within a given quarter. However, we continue to believe we will show an increase in backlog for the full year. Gross margins were 54.2% for the quarter, up from 51.3% in the prior year period and 54% in the previous quarter. The year-over-year improvement in gross margin was driven primarily by a favorable mix in revenue towards our higher-margin subscription-based business, in addition to cost efficiencies we began driving in the second half of 2022. The slight sequential increase in gross margin benefited from a lower mix of pass-through revenue from our Helix business and reduced expenses associated with payroll taxes following our Q1 annual equity vesting and bonus payout. Total operating expenses for the second quarter were $72.9 million or 47.1% of revenue compared to $67.4 million or 48% of revenue in the second quarter of 2022 and $72.5 million or 47.4% of revenue in the first quarter of 2023. The year-over-year and sequential decrease in operating expenses as a percent of revenue were driven primarily from improved cost scaling to revenue within sales and marketing and research and development through the effective utilization of our global workforce and enhanced productivity, which more than offsets the increase in G&A expenses, which were predominantly related to third-party fees. As a reminder, we mentioned that our annual client conference would incur additional costs in the second quarter, and therefore expect to see improvement in sales and marketing cost scaling to revenue in the second half of the year. Total adjusted EBITDA was $17.6 million for the second quarter, a company record, and up from $9.7 million in the prior year period and $16.5 million in the previous quarter. The roughly 450 basis points of improvement in adjusted EBITDA margin from a year ago benefited from the mix towards higher-margin subscription revenue, more effective utilization of our global workforce, and broad-based efficiencies across the organization. The sequential change in adjusted EBITDA benefited from lower-than-anticipated bad debt as well as cost efficiencies associated with developing, delivering, and supporting our solutions. We ended the second quarter with cash, cash equivalents, and investments of $280 million, up from $271.7 million at the end of the first quarter. We generated positive cash from operations of $13.1 million as a result of our continued emphasis on profitability and strong working capital management. We also generated free cash flow of $3.7 million in the quarter, resulting in positive free cash flow for the first half of the year. Typically, our first half is a more challenged period for our cash flow generation based on seasonal drivers. But for the first time in company history, we delivered positive free cash flow for the first 6 months of the year. Let me wrap up by sharing our third quarter and updated full year guidance. We forecast third quarter non-GAAP revenue in the range of $153.5 million to $156.5 million, and full year non-GAAP revenue in the range of $620 million to $628 million, representing year-over-year growth of 9% to 11%. We forecast third quarter adjusted EBITDA of $17 million to $19 million. And we're raising our full year 2023 adjusted EBITDA to a range of $71 million to $75 million, representing approximately 11% to 12% of non-GAAP revenue for the year. In summary, for the second quarter, we delivered revenue results at the top end of our guide with adjusted EBITDA results above our expectations. We continue to see our total revenue and ARR growth driven by our higher-margin subscription-based business. This, combined with our continued focus on driving cost efficiencies, gives us confidence in raising our adjusted EBITDA outlook for the remainder of the year, as well as our ability to meet our Rule of 30 target at some point in the back half of 2024. With that, I'll turn the call back over to Matt for his closing remarks.

Thanks, David. In closing, I'm extremely pleased with our performance in the first half of the year and the direction of our business moving forward. Our broad mix of deals and consistently high win rates demonstrate both the continued demand for our solutions and our competitive positioning in the market. Looking ahead, we expect to focus on deposits to maintain a favorable demand environment for our solutions. And when you consider our sales execution in recent quarters, the continued recognition from industry analysts like Aite-Novarica, and the tailwinds we anticipate from our annual client conference, we believe we enter the second half of the year with a lot of positive momentum. We remain laser-focused on converting our pipeline and executing against our profitable growth strategy to continue driving value for employees, customers, and shareholders. Thank you, and I'll hand it over to the operator for questions.

Your first question comes from Matthew VanVliet with BTIG.

Wanted to dive in a little bit on not only the bookings strength, but the backlog commentary and just sort of how the progression of rollouts are going, the appetite for customers to go live as sort of quickly as possible and how various parts of the Innovation Studio are helping sort of speed that process along to get customers to revenue?

Matt, as we've talked about, we've had great strength in bookings over the last few quarters. Now a lot of those deals were larger in nature. When you have larger deals and more complex deals, you tend to have elongated time to revenue. We're certainly expecting that. And in regard to Innovation Studio specifically, the team there has gotten very efficient. So that does not become an obstacle in terms of delivering on the implementation dates that we've agreed on with our customers. So if you think about Implementation Studio, it's obviously an incremental aspect of the digital banking solution, but it does not elongate it. What elongates the deals are the overarching complexity and size of the digital banking opportunity.

Very helpful. And then Jonathan, on the Helix deal in the quarter and maybe looking at sort of all of the additional features you're adding, and you mentioned every deal in this quarter even on the digital banking side included Innovation Studio. So obviously, kind of a broad question here, but what are you doing for the nontraditional institutions that are seeing an increasing rate of adoption? And then maybe just touch on how much of that has been sort of brought over from the digital banking side and enabling some of those capabilities?

Yes. So I will start on the digital banking side with Innovation Studio. Yes, there, we're seeing a lot of adoption at scale. I think if we had this conversation 6 months ago, a year ago, we would have been talking about one or two apps on a small segment of financial institutions. And now we're starting to see multiple apps go live across numerous financial institutions. And so what I would say is just as this continues to get further and further into the flywheel of adoption, we're just looking for more opportunities to get these products into the hands of their end users faster and, really importantly, helping them market these solutions to their end users, because there's only so much value in putting more products in the hands of the financial institutions if they're not actually getting utilization and adoption by their customers. And so that's really where the focus is on. It's how do we help them extract the value they're getting from this incremental innovation that we're putting in their hands. And then translating over to the Helix side, we are seeing a lot of cross-pollination between Innovation Studio and Helix when it comes to talking to banks that want to participate in the bank of record program, talking to larger fintechs who want to think about launching an embedded finance program. When I think about the big win we had in the quarter and just some of the momentum and the pipeline going forward, the common theme is there is more focus around deposits, sort of similar to Matt's commentary around digital banking and the focus on deposits. That's true across financial services. And so that's really driving the strategy. It's certainly driving the strategy of the big win we talked about in the quarter. So lots of good things happening, but we're just trying to facilitate getting more of these deals in the door and getting these products and the adoption flywheel rolling as fast as we can.

Your next question comes from the line of Adam Hotchkiss with Goldman Sachs.

Matt, could you just dig a little deeper on how the demand environment is evolving, particularly as it relates to the larger ASPs you talked about? When you think about how things are going now and what's driving customers to land broader with you guys, how sustainable do you think that is over a multiyear period? And how much of that is just sort of reminiscent of the current demand environment?

Yes, as we've discussed, achieving a strong fourth quarter like the first and second is not typical for us. In the first quarter, we secured three major Tier 1 clients and two in digital banking, along with one on the relationship pricing side. Given the current demand for deposits and the challenges posed by competitors who provide comparable digital banking experiences to the top four institutions, we find ourselves in a very favorable position. Our extensive range of products, our expertise in providing and supporting them, and our seamless integrations put us at an advantage. With the current strong demand for deposits, we are uniquely positioned within the $1 billion to $250 billion bank and credit union market, and I believe this momentum will persist in the near future. I do not foresee any easing in the deposit side of our business, indicating this trend may continue for some time. Our pipeline supports this, as it remains robust following our last three strong quarters, and I expect to finalize those deals and end the year on a high note.

Great. That's really helpful. To focus on Q2 Innovation Studio, how significant do you believe the opportunity is for your team? I can envision a scenario where numerous partners and developers collaborate with you on various functionalities across the platform. Considering both the potential depth and breadth of the product offerings, how much do you think this can enhance your penetration in the financial institution space compared to your current standing? I would appreciate your overall perspective on the potential for growth in this area.

Yes. Jonathan, why don't you take that? You built that business.

Yes. Well, I'd start by just saying when we think about the universe of products that we're adding, these partners that are coming and building to our APIs and then embedding within digital banking, we very much see that as an extension of our own R&D paradigm, our own innovation that we are widening the aperture of what we can deliver to our customers and to their end users. And so when you think about R&D scaling, when you think about long-term from a P&L perspective, what that brings from a margin perspective, there's a lot of value there. But when you sort of talk about what it could do from a penetration perspective to our customers, I mean, we've seen it quarter-over-quarter for the last several in terms of the way it's impacting our net new wins. As I talked about on this call, 100% of the net new digital banking wins cited Innovation Studio as a key reason for selecting us. As we consider how the overall economics will evolve over time with more partners integrated into the banks, it's clear that the banks benefit from economics through interchange and revenue sharing on subscription income. Importantly, they are also significantly reducing costs related to one-time integration fees and ongoing partner fees, which would have minimum requirements if they opted for a direct model. These factors contribute to increased customer engagement, improved retention, and greater loyalty in the long term, ultimately leading to an economic model that benefits all parties involved. We view this as a crucial aspect of the business, with the potential for considerable economic value derived from revenue and high margins. We find this potential particularly compelling for the future and believe it can significantly support the business. I hope this clarifies the question.

Your next question comes from Terry Tillman with Truist Securities.

Solid job on the results. First question for me is we're not hearing much about large increases in ASPs or deal sizes. So it's impressive about the 30% growth there. I'm curious, actually. Are some of this around the product and packaging that you all have been evolving over the last 1.5 years with Q2 Catalyst? How much of a catalyst, no pun intended, is that with some of this big ASP growth? And then I had a follow-up question.

Yes, the demand for pricing relationships, onboarding, fulfilling, and managing operating accounts is central to what we're experiencing, and our timing has been excellent. Kirk is here with me, and he played a significant role in that. A lot of this is tied to the Catalyst product, and as I mentioned earlier, every deal also included retail components. We're seeing success across retail, small businesses, and commercial sectors. The PrecisionLender tool for relationship pricing has brought in deals earlier than I anticipated, which is encouraging. Everything is coming together well, not only with the Q2 Catalyst solution but also with all the features and products we've invested time and effort into over the last 19 years, especially in the last 4 or 5 years focusing on commercial banking. The Catalyst product stands out in the market, which is reflected in our win rates and average selling prices.

Got it. And I guess in terms of some puts and takes that are going to continue as we move into '24, I'm just curious if there's anything you all can share kind of growth algorithm-wise in terms of you've got this ongoing probably weak discretionary services, transactional revenue. And then at some point, maybe FRB dynamics, offset by the string of strong bookings. I mean anything at all you can share about as you look further out and how to think about some of those puts and takes?

Terry, you addressed many of the variables and the question itself. It's still early to provide any specific outlook for 2024, but based on our current knowledge, we anticipate that the pressures in transactional and services will persist into 2024. Additionally, it's important to consider the impact of FRB transitioning off our platform at some point during the year. Regarding subscriptions, Matt raised a question about delivery times. As I mentioned in my response, while we have certainly seen strong bookings, they are primarily from large deals. We need to take that into account as we evaluate the launch timelines for those deals over the next 6 to 18 months. Furthermore, we must assess how the second half of 2023 bookings will unfold, considering the composition in terms of cross sales versus net new business, as well as the overall size. As we have consistently discussed and will continue to do so, we are actively implementing efficiencies and managing the cost structure of the business, and we expect that our path to achieving the Rule of 30 by the end of 2024 will heavily focus on EBITDA expansion.

Your next question is from the line of Joe Vruwink with Baird.

Maybe just picking up on that last question. So I wanted to ask about pipeline and how you think about risk-adjusting pipeline, just given, obviously, digital banking is in vogue and you're talking about big opportunities, but the big opportunities also come with timing and sales cycles that can be a bit trickier. And then related to the last question just on sales cycles, obviously, anything booked now doesn't really impact this year, but how might that kind of risk-adjusting of pipeline factor into kind of the back half of next year and that Rule of 30 framework you're discussing?

We have extensive experience with risk adjustment in our pipeline. We're actively analyzing deals and engaging in discussions at both executive and representative levels. Our focus is on understanding when decisions will be made, particularly as the end of the quarter approaches. We typically don't finalize deals right at the end of the quarter since we don't recognize revenue from them. Based on our current close and win rates, our pipeline is expanding, with larger deals in terms of average selling price and the size of the financial institutions involved. I'm optimistic about our positioning, especially for the second half of this year. Deals related to PrecisionLender tend to be larger and take longer with top 100 institutions. However, these also offer significant expansion possibilities across various lines of business and geographies, as we've already seen with the PrecisionLender product. I anticipate further developments in 2024 and 2025. David can provide insights on the flow of these deals and how we'll align product delivery timing with financial institutions' capabilities. Overall, the outlook is positive, and while it may take time to deliver these products, strong performance now will lead to benefits over the long haul. David, would you like to add anything?

No, I think you hit it, Matt.

Okay. And then I don't want to let David off the hook. So maybe one question for him. Just on the booking strength, do you think some of the trends in RPO, looking at maybe the next 24-month contribution or even longest-term segmentation of RPO, is that kind of the best place to look to foot to the booking strength? Because then I want to relate it to maybe the calculated billings in the quarter decelerating, and just getting your take on kind of the best set of numbers to look at.

Yes, Joe, I would say a couple of things regarding RPO. One important point is that it's crucial to consider it over a longer period to understand the revenue opportunities ahead. Analyzing it quarter by quarter can be misleading due to the variations in renewals. We've highlighted this before, but it's important to remember that in Q4 of last year, we accomplished 43% of our renewals, resulting in a significant increase in our backlog at that time. We anticipate a similar pattern this year, with renewals concentrated towards the end of the year, which is typical for us. I would advise focusing more on our ARR, which reflects how it's growing, along with the strong subscription growth rate of 16% year-over-year. Additionally, 12% of our ARR is not live yet, which is the highest we've seen in a few years. This indicates potential revenue that could be realized over the next 12 to 24 months.

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

This is Matthew Kikkert on for Parker. To start, I'm curious what your thoughts are on the health of regional banks and credit unions right now coming off of the Q1 banking crisis. And how is that impacting layers of your revenue guidance for the remainder of the year, particularly around discretionary services spend?

Kirk, do you want to jump into the health of the banks and the credit unions? And then we can just take the guidance one.

Yes, absolutely. The need for banks and credit unions remains strong, and the small crisis we experienced at the end of the first quarter doesn't alter that. When it comes to the services they provide, people often simplify banks and credit unions into a single entity, usually influenced by the last news article they read. However, there is considerable diversity within the communities they serve and the institutions themselves. We view this positively. Our customer base and the prospects we're engaging with demonstrate significant strategic thinking and operational focus. While they are concentrating on deposit pricing and maintaining their customers' operating accounts and credit, they are also prioritizing their most critical objectives to navigate through this challenging period. We believe that digital remains one of those key priorities.

I recently spoke with a representative from a $10 billion financial institution who mentioned that some customers are starting to move their deposits to larger banks. These customers are already feeling frustrated with communication, responsiveness, follow-up, and pricing. In any business, whether small or large, having a good banking relationship is essential. Banks must be accessible and understand the challenges their clients face, be it in the local community or their specific industry. This understanding and ability to address issues is something that many of our customers, including banks and credit unions in both retail and commercial sectors, provide. I believe this trend will persist as the situation from March 10 stabilizes. David, you can elaborate on the guidance, but I would just say that it is included in our outlook.

It is. That's the short answer, it's folded in. Matthew, in May when we took down our revenue guidance, it was predominantly related to the discretionary spending component that we've been talking about, and that was part of your question. We do have more certainty now than we did 3 months ago. That's probably not surprising. And as a result, we've tightened the range by $2 million at the bottom, $2 million at the top, at the same midpoint. So how we viewed that discretionary spending back in May is still relatively aligned with how we're viewing it today. It's just the high end and the low end have tightened a bit.

Okay. That's good to hear. And really interesting on the relationship side. And then secondly, you start to generate additional free cash flow as part of your margin expansion strategy. Could you talk a bit about your capital allocation plans over, let's say, the next 2 to 3 years?

Sure. We're constantly looking at optimizing our capital allocation. There's obviously different levers and opportunities that we have. We pulled one of those levers in March in terms of buying back some of the convertible debt that was outstanding at a discount. That generated a nice return for us. We're constantly pursuing the landscape to understand if there's opportunities out there, and I'll let Jonathan sort of talk about the M&A environment at large. And then obviously, we're deploying our cash internally to the investments internally that we think are going to generate the best and biggest return. And we're being much more focused over the course of the last 9 to 12 months. Matt had talked about some of the things that we began doing in August of last year, both in terms of our cost structure and in terms of our capital allocation and making sure that where our investments are going are to where we're going to generate the biggest return. And the areas that aren't, we're de-investing in. And we think that, that's going to provide the most value to our customers as well as to our shareholders. And Jonathan, do you want to talk about the M&A environment?

Yes, I would just say, we're constantly evaluating the M&A landscape. We think over the long run, you mentioned 2 years, like as we get out 2-plus years out, we think there's going to be lots of opportunity for consolidation across the fintech landscape. But what I would say is sort of sitting here now and looking at the pipeline is between the converts that David mentioned and the overall financing environment we're in, there's a lot of scarcity value to our cash balance that we have. And so we're going to be very disciplined and have a pretty prudent approach to thinking about allocating capital towards M&A and making sure that both value and quality of asset come in line. And in our view, what we've seen, especially in the private M&A markets, those 2 things haven't come in line yet, but we'd expect that to happen here over the coming 6 to 18 months. So always watching it but cautiously waiting for that opportunity.

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

Matt or David, I know third quarter isn't historically a big bookings quarter for you all seasonally. But given some of your earlier comments on pipeline and then the earlier deal closings that you referenced for PrecisionLender, what are you underwriting for the rest of the year in terms of kind of sales cycles and demand backdrop for subscription bookings relative to what you saw in the first half of the year?

Yes, we do not provide very specific guidance on subscription compared to transactional and services. However, we firmly believe that subscription will grow significantly more than the other two revenue streams. We expect this trend to continue into Q3 and Q4. In fact, looking specifically at Q3 from a sequential perspective, our guidance anticipates a likely decrease in the combination of transactional and services, while subscription will see sequential growth. This should give you a starting point for Q4, where we again expect substantial growth in subscription compared to continued subdued services and transactions.

Okay. Great color on that. And then just as a follow-up, Matt or Kirk. I did want to ask about some of your more data-oriented solutions. So great PrecisionLender success this quarter. And Q2 SMART as well, I'll lump in that bucket. But can you just elaborate a little bit more on what's driving the uptick in demand for those year-to-date in the current backdrop?

Yes, thank you for the question. I think this particularly applies to the relationship pricing aspect for PrecisionLender. We are in a business environment where many bankers lack experience, particularly in commercial banks. The extensive data we have allows us to provide effective coaching tools for them to use daily when interacting with their customers. This enables them to prioritize what differentiates them: their relationships with those running businesses. We believe this is a crucial factor in the interest and strength we're seeing. Even if rates decrease at some point, the competitive landscape will remain unchanged for quite a while. Bankers will continue to need to leverage as much data as possible. Ultimately, it's about the bankers using that data effectively every day, which is where many of our solutions are aimed.

I would like to add that all of these factors, along with the analytics and data we utilize in our fraud detection tools for payments and identifying individuals in the system, are having a significant positive impact. We've successfully reduced fraud with the demand for these systems skyrocketing. I mentioned earlier that we saw 5 billion log-ins in the past year on the application, and not all of those come from legitimate users. We are leveraging this data to combat fraud, and it is nearly linked to every single deal we make. Existing customers who haven't yet adopted this are next in line to receive it. This represents a major cross-sell opportunity for us and is included in most of our new deals. As noted in the script, our team has extensive experience with data, which we take very seriously, and we are committed to using it effectively for our customers. Whether it's to gain a better understanding of our customers, cross-sell products, or prevent fraud, we are truly enthusiastic about this opportunity.

Got it. That's great added color. I did see the new Security Insights announcements, and I know those are core to the Q2 Catalyst package.

Absolutely. Thanks, Alex.

Your next question comes from the line of Bob Napoli with William Blair.

This is Adib Choudhury on for Bob. So one question, bigger picture on Helix. Could you kind of frame the embedded finance opportunity more broadly for Helix and if you're seeing an acceleration just in terms of brands or fintechs and obviously, you guys have diversified with the insurance one, but just kind of that demand for financial products from non-financial institutions? And then maybe a bit on the competitive landscape there as well.

Certainly. This has developed over the past year, where initially, many industries showed interest in embedded finance. Any sector of the economy with a strong brand and loyal customer base was considering entering this field. However, as the year progressed and companies focused on their core operations, the number of viable candidates for embedded finance strategies has decreased. Recently, our successes have been concentrated in industries closely related to traditional financial services, particularly insurance and wealth management. We still see significant potential in embedded finance; we believe that brands and fintech companies will continue to value and engage in this area long-term. However, the past year has revealed that fewer companies are willing to pursue this strategy unless it closely aligns with their main business focus. Regarding the competitive landscape, we haven't noticed much change. Many providers that emerged during a time of strong fintech funding are primarily middleware providers rather than core service providers like us. This distinction is evident in the regulatory expectations imposed on different types of organizations. Our core offering gives us a competitive edge compared to those middleware providers, particularly concerning compliance and operational controls. Larger players, such as Green Dot and Galileo, remain active in this market, executing acquisitions and adapting their businesses over time. The landscape is continuously evolving, and we believe we are uniquely positioned with our Helix product and go-to-market approach. We are concentrating on areas where we have a competitive advantage and are executing our strategy effectively.

Your next question is from the line of Andrew Schmidt with Citi Global Markets.

Congratulations on the steady results. I wanted to talk about the win rate a bit and I apologize for joining late if this has already been addressed. The win rate remains elevated and positive. What do you think is driving this? Clearly, there’s a self-driven aspect related to your product offerings, and I believe commercial capability plays a role as well. Are there also competitive or market dynamics contributing to this increased win rate? I would love to explore what is behind that elevated win rate.

Thank you, Andrew. There are a couple of factors at play. The efforts of our 2,300 employees who work tirelessly every day to ensure an excellent customer experience significantly contribute to our software sales. They are dedicated, often taking early morning calls to address issues. At our recent conference, I haven't seen customers this satisfied with our delivery, not just regarding our products but also the associated services. Additionally, our products stand out in the marketplace, whereas other providers seem to be facing challenges, particularly larger companies that may be distracted by various other priorities. In the current environment, with an increased regulatory focus on financial institutions, it can be tough for smaller, less profitable companies that aren't publicly traded to engage with potential clients. This creates a level of instability among the larger providers, as well as hurdles for smaller clients trying to navigate regulatory processes. This situation contributes to our current win rate.

That's great to hear. Could you elaborate on your technology initiatives? I know you have many ongoing projects, and we've discussed this before, so perhaps a brief recap would be helpful. I'm aware that you're focusing on aspects like migrating workloads to the public cloud and optimizing code bases. Please share what you're working on internally, the progress you've made, and how it might impact gross margin over time.

Certainly. You mentioned a few points, and I want to emphasize that throughout the company's history since 2019, we have never been stagnant. We are constantly advancing, whether it's enhancing our products and code or improving our infrastructure and customer support strategies. Our daily focus is on significant initiatives like cloud migration, as well as numerous smaller efforts that contribute to our overall effectiveness. By eliminating complex processes and simplifying our operations, we create a more efficient business environment. We've also improved our ability to prioritize tasks and clearly understand the decisions we make, which has been very beneficial. We're optimistic about upcoming opportunities in areas like artificial intelligence, which can enhance our operations and product offerings. While it's still early to determine the exact impact, we recognize potential there. All of these efforts, whether large or small, contribute to a sustainable operational model that we can consistently pursue.

Yes, and Andrew, on the gross margin initiatives, you touched on one of them, and that's one that is not going to have an immediate impact to the P&L. You've got to look out 3 to 4 years before that starts to have material impact positively on gross margin, and that's migrating workloads out to the cloud. We're doing that in concert with our customers with their feedback and making sure there's absolutely zero disruption. And so it's happening in a very gradual fashion. We migrated about 25% of the workloads over last year. And this year, we're going to do about another 25%. And you can assume that the next 2 years following we'll get the remainder of it. But shorter term, you've obviously seen that we've shown some pretty significant increase in gross margin. I think it's about 320 basis points year-over-year. Most of that is driven by things like migrating some of our tasks to our global workforce, and you can't do that without doing it with process improvement. So we've been able to drive process improvement across the organization, make things much more repeatable and predictable, and as a result, able to effectively utilize our global workforce much more so than we were able to even 12 months ago. We're doing the same thing with support. And then we're also doing a lot with pricing and packaging, and that's not only on new deals but also through renewals. We're using tools that we have internally and, obviously, different levers to make sure that as we're going through the renewal process, we're extracting the value that we're providing to our customers through that process and doing so in a much more thoughtful way. So all of those are adding up; you start stacking those on top of each other, and that's what drives the type of gross margin accretion that you've seen from us over the last 3 to 4 quarters.

There are no further questions at this time. Ladies and gentlemen, thank you for participating. This concludes today's call. You may now disconnect.