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

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our third 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 the 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 for the third quarter of 2023 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 today with the SEC. We have also published additional materials related to today's results on our Investor Relations website. Let me now turn the call over to Matt.

Thanks, Josh. I'll start today's call by sharing our third quarter results and highlights from across the business. I'll then hand it over to Jonathan to discuss a few highlights from our emerging businesses. David will then discuss our financial results and guidance in more detail. In the third quarter, we generated non-GAAP revenue of $155 million, up 7% year-over-year. We also continued to deliver on our commitment to improve non-GAAP profitability in the quarter with adjusted EBITDA of $19.7 million or 12.7% of revenue, an improvement of over 500 basis points of adjusted EBITDA margin over the prior year quarter. In addition to the financial results, we had broad sales success in the quarter. As we've highlighted for several quarters, the rising interest rate environment and events in the banking industry have led financial institutions to prioritize attracting, retaining, and growing deposits. That focus on deposits is leading financial institutions of all sizes to reevaluate their customer-facing technology, which is translating into a strong pipeline for digital banking. And we believe our digital banking portfolio is uniquely equipped to help financial institutions grow deposits and drive profitability, from industry-leading retail and commercial solutions that help our customers win valuable deposit accounts to Q2 Innovation Studio, which helps drive customer engagement, retention, and non-interest fee income, and was once again a key driver in every digital banking win from the quarter. This focus on deposits drove a number of key deals in the third quarter. On the digital banking side, we had a broad mix of retail and commercial deals across our market segments, including two of the top 10 largest digital banking deals in company history. We also signed meaningful expansion deals with multiple enterprise and Tier 1 customers for our relationship pricing solutions. One of the highlights was a net new digital banking deal with a top 20 U.S. bank that has more than $200 billion in assets. The bank selected our digital banking platform to serve their critical small business and commercial customers. This is a significant win on several levels. In terms of annualized recurring revenue, this customer is among our top 10 largest digital banking deals of all time. Historically, banks of this size have relied on a mix of homegrown technologies for digital banking. But the current focus on growing deposits is pushing financial institutions of every size to invest in best-in-class technology, improving their user experience and delivering innovation faster than they can on their own. And the depth of our commercial product set, along with our proven ability to deliver, implement, and support commercial products at the enterprise level, helped us earn our way into and ultimately win this significant opportunity. The second deal I want to highlight is a comprehensive platform deal with a $20 billion bank that was also a top 10 deal in company history in terms of annualized recurring revenue. This is another example of a large bank that felt it was critical to upgrade to a technology platform that would allow them to move fast and differentiate themselves in the current economic environment. And in this case, they selected us to be the single platform to serve their entire customer base across retail, small business, and commercial. In addition to contributing to strong demand for our solutions, some of the changes in our customers' operating environments are creating new opportunities for innovation. We recently announced two new product innovations designed to address these opportunities for our customers. First, we've talked a lot about the focus on deposits. Today, many of our customers are evaluating new creative ways to differentiate themselves, reach new customers beyond their traditional markets, and acquire and support retail deposit relationships profitably. To help address these challenges, we recently announced Q2 Fabric, a turnkey direct bank offering, which combines our digital banking front end with the lightweight core of Helix. This is a great example of our ability to innovate and quickly respond to new market dynamics. And Jonathan will provide more detail on Q2 Fabric shortly. Another area of focus for our customers today is artificial intelligence. And to help them capitalize on that opportunity, we recently announced the Andi Copilot platform, a copilot solution purpose-built for bankers. We originally built Andi in 2017 as a chat-driven assistant within our relationship pricing solutions. Today, it is used by more than 29,000 bankers across 150 financial institutions, where it delivers bank, client, and deal-specific pricing recommendations in real-time as commercial bankers design their deals. For AI to deliver real value, it has to be powered by data and knowledge that is specific to our industry and customers. And via the Andi Copilot platform, we will combine our vast amounts of digital banking and lending data with a proven copilot that can deliver the right information to the right banker at the right time, helping make our customers more effective and efficient across a number of critical use cases within the Q2 product portfolio and beyond. While Andi has been in production inside of relationship pricing for years, both Q2 Fabric and the Andi Copilot platform are early in their product life cycles. Over the coming months, we'll be partnering with early adopters to further develop and refine both solutions, and we look forward to sharing relevant updates on future calls. We have always been an innovation-driven company, and both Q2 Fabric and the Andi Copilot platform demonstrate our ability to leverage and develop our unique technology assets to solve real timely challenges our customers face in the market. With that, I'll hand the call over to Jonathan to share a few highlights from our Q2 Innovation Studio and Helix teams.

Thanks, Matt. I'll start with Q2 Innovation Studio, which had a particularly strong quarter, driven in part by the tremendous engagement and activity at CONNECT, our annual client conference. We had record adoption in terms of our customers partnering with fintechs, almost 100 new partnership deals in the quarter, representing 40% growth over our previous best quarter of adoption. The benefit of this adoption is that it can lead to a flywheel effect. The more partners and customers use Innovation Studio, the stronger the ecosystem becomes, which in turn can drive meaningful customer outcomes, increase retention, and differentiate Q2 in the digital banking sales process. As Matt mentioned, Q2 Innovation Studio has become an essential part of our value proposition and was once again a key driver in all of our digital banking wins from the quarter. We're particularly excited that the top 20 bank we signed plans to make Q2 Innovation Studio a core component of its digital strategy, where it will use Innovation Studio to deliver innovative, fee-generating products to small business and commercial customers. Shifting to Helix. We had a few noteworthy highlights I'd like to share. First, we had a meaningful cross-sell with one of our largest clients. We worked with this customer to develop a new piece of functionality for the Helix platform that will allow them to have full control over transaction authorization to drive a better customer experience and improved fraud management. The addition of this new product will drive an immediate lift in the monthly recurring revenue associated with this partnership, and it also gives us a new piece of functionality that differentiates Helix from other embedded finance providers and can be cross-sold into other key Helix customers and prospects. Second, we had a meaningful customer go live in the quarter with a bank that launched a new digital brand powered by the Helix core technology. This customer made the decision to launch a new brand in order to attract digital-first consumers outside of its traditional market with targeted deposit products as a way to drive new customer acquisition and grow deposits. This is a trend we're seeing more and more, and it's exactly the use case that led us to develop Q2 Fabric. Given the current priority on deposits, many financial institutions are looking to launch new digital-only products like stand-alone high-yield savings accounts that they can use to attract and profitably serve retail depositors. To execute this strategy, financial institutions require a lightweight, flexible core technology that allows them to launch easily, onboard new customers seamlessly and then profitably serve and grow those retail relationships over time. The Helix core platform is built to serve this purpose. It operates in real-time. It's designed for digital-only customers, and it can support retail deposit accounts at a fraction of the cost of traditional cores. And it is a proven, highly scalable technology that supports more than 15 million end users today. Through Q2 Fabric, we will use the Helix core combined with our best-in-class digital banking front-end to give financial institutions a turnkey full stack solution to easily launch their own digital deposit products. It is very early innings for Q2 Fabric, but we believe it's an exciting new way to take Helix to market with financial institutions. And we believe that over the long term, Q2 Fabric has tremendous potential to help our customers differentiate themselves, diversify their strategies, and grow deposits. With that, I'll hand the call over to David to discuss our financial results from the quarter.

Thanks, Jonathan. When we began the year, we communicated our focus on delivering accelerated growth in subscription revenue coupled with significant expansion of our margins and cash flow. Through three quarters of the year, we've made good progress on these focus areas. I will now discuss our financial results with emphasis on these priorities and conclude with updated guidance for the fourth quarter of 2023. Non-GAAP revenue for the third quarter was in line with our expectations, coming in at the midpoint of our guidance, with adjusted EBITDA once again exceeding the high end of our guidance due to an increasing mix of subscription revenue and continued execution on accelerated cost efficiencies across the business. Additionally, our growth in subscription ARR, backlog, and average selling price for the quarter benefited from our continued net new booking success, highlighted by two digital banking wins, which were among the top 10 largest deals in company history. Total non-GAAP revenue for the third quarter was $155 million, an increase of 7% year-over-year and flat sequentially. The year-over-year increase was driven by growth in subscription-based revenue, which was up 11% year-over-year. As we previously communicated, third quarter revenue growth rates were expected to temporarily come down. The annual growth rate was pressured by a high number of customer go-lives and associated revenue concentrated in the third quarter of 2022. This year's go-lives are concentrated in the fourth quarter, and as a result, we expect a reacceleration of revenue and subscription growth as we close out the year, which is reflected in our guidance. The relatively flat sequential revenue was a result of subscription revenue growth offset by an anticipated decline in the usage-based revenue associated with normal seasonality we observed within our Helix business. Our subscription revenue for the quarter was 77% of total revenue, a company record and up from 75% in the previous quarter and 74% of total revenue in the prior year period. Both the year-over-year and sequential growth of subscription revenue were driven by an increase in cross-sold solutions within our digital banking business. Transactional revenue represented 10% of total revenue for the quarter, down from 11% in both the previous quarter and the prior year period. The decline in transactional revenue as a percent of total revenue was 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. As expected, we also saw a continued decline in services and other revenue. This was the result of lower revenue from discretionary services as well as a decline in Helix pass-through revenue, which is categorized in this revenue line item. During the quarter, we added more than 300,000 users to our digital banking platform, ending the quarter with over 22 million registered users, an increase of 5% year-over-year. Total annualized recurring revenue or total ARR grew to $693.6 million, up 9% year-over-year. Previously, we referred to total ARR as ARR. Going forward, we will be disclosing subscription ARR as well. Our subscription ARR grew to $547 million, up 14% year-over-year, which was driven largely by net new deals within our digital banking business and continued expansion with existing customers. Given the high concentration of go-lives that occurred in the third quarter of last year, we anticipated a deceleration in year-over-year total ARR growth for the third quarter, followed by a reacceleration in the fourth quarter. We also expect subscription ARR growth will exceed total ARR growth for the remainder of the year and into 2024. We ended the quarter with total backlog of approximately $1.6 billion. This represents year-over-year growth of 13% and sequential growth of 2% or $37 million. Year-over-year and sequential increase was primarily attributable to strength in net new bookings, particularly within digital banking, where we saw increases in ASP and contract duration as well as a strong renewal performance. Gross margins were 53.9% for the third quarter, up from 52.1% in the prior year period and down from 54.2% 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 delivered over the last 12 months. The sequential decline in gross margin was attributable to an increase in implementation cost during the quarter. Total operating expenses for the third quarter were $71 million or 45.8% of revenue compared to $69.8 million or 48.2% of revenue in the third quarter of 2022 and $72.9 million or 47.1% of revenue in the second quarter of 2023. The year-over-year and sequential decrease in operating expenses as a percent of revenue were driven predominantly from improved cost scaling to revenue within sales and marketing as a result of operational efficiencies. The year-over-year decrease also benefited from improved utilization of our global workforce within R&D. In addition, we saw a sequential decline of G&A expenses associated with lower third-party costs. As a reminder, our annual customer conference took place in the second quarter, which resulted in sequential favorability within sales and marketing. Total adjusted EBITDA was $19.7 million for the third quarter, up from $10.8 million in the prior year period and $17.6 million in the previous quarter. This quarter's results demonstrate an improvement of over 500 basis points in adjusted EBITDA margin from the prior year period driven by revenue mix and cost initiatives already discussed. We ended the third quarter with cash, cash equivalents, and investments of $290.8 million, up from $280 million at the end of the second quarter. During the quarter, we generated cash flow from operations of $16.8 million. For the first 9 months of the year, we've also generated $9.8 million of free cash flow. We anticipate driving meaningful free cash flow in the fourth quarter aligned with historical seasonality, which we expect to result in an adjusted EBITDA to free cash flow conversion of over 60% for the full year. Let me wrap up by sharing our fourth quarter and updated full year guidance. We forecast fourth quarter non-GAAP revenue in the range of $160.3 million to $163.3 million and full year non-GAAP revenue in the range of $622.5 million to $625.5 million, representing year-over-year growth of approximately 10%. We forecast fourth quarter adjusted EBITDA of $21.2 million to $23.2 million, and we're raising our full year 2023 adjusted EBITDA guidance to $75 million to $77 million, representing approximately 12% of non-GAAP revenue for the year. In summary, for the third quarter, we delivered non-GAAP revenue results at the midpoint of our guide and adjusted EBITDA results over our expectations. We continue to see subscription revenue becoming a more meaningful mix of our business and anticipate our subscription revenue growth will accelerate in the fourth quarter. Over the course of the last year, we've demonstrated our ability to drive meaningful expansion in gross margin and adjusted EBITDA margin, which gives us the confidence to raise our adjusted EBITDA outlook for the remainder of the year. As we continue to go through our 2024 planning process, I want to share some preliminary expectations. Based on the bookings success we've observed year-to-date, our sales pipeline, and the strength of leading indicators such as subscription ARR, we anticipate that our subscription revenue growth rate will be at least 13% for the full year 2024. We expect this will result in a greater mix of higher-margin revenue in 2024. And when coupled with our efforts to drive greater cost efficiencies, we remain confident in our ability to achieve our previously communicated Rule of 30 late in 2024 and drive total company adjusted EBITDA of at least $105 million for the full year of 2024.

Thanks, David. I'll conclude by reiterating a few key takeaways from the quarter. First, we saw the focus on deposit growth continue to drive demand and sales success. We had a broad range of net new and expansion wins highlighted by two of the top 10 largest digital banking deals in company history. We're continuing to innovate with new solutions that we believe can solve real pressing problems for our customers and create new ways for Q2 to deepen our own customer relationships over time. And we're surrounding our technology with a superior customer experience. Given the criticality of digital in this environment, effective software delivery and customer support are at a premium, and they are important differentiators for us. All of these things combined to create a business that is extremely durable. And given the strength of our pipeline, I believe we will finish the year strong and position ourselves for continued growth and profitability improvements in 2024 and beyond. Thank you, and I'll hand it over to the operator for questions.

Our first question comes from Alex Sklar with Raymond James.

Great. Can you provide more details about the top 20 win from a competitive perspective? What was the customer using previously? Was this part of a formal RFP? Why did we win against the competitors? Also, do you anticipate this will contribute to results before the end of 2024, since it was booked in the third quarter?

What was the last part of that? You cut out on the expect before the end of Q4.

If the timing of that implementation can contribute to revenue in 2024.

We don’t specify who our competitors are, but anyone with a commercial product was competing for that deal. It highlights the efforts we've made in our commercial banking offering over the past 19 years, focusing not just on features and functions but also on delivery, support, and maintaining system reliability. Other vendors seem to face numerous issues in those areas. Winning this deal was highly competitive, and we're proud of the team's collective efforts, not only the sales team but the entire company. Our products are gaining traction thanks to our unique platform and the excellent user experience across mobile, tablet, and desktop for commercial customers. Many larger financial institutions are realizing they can’t keep up with technology providers like us, and the costs associated with development and engineering become burdensome. I believe this marks the start of more opportunities in the upper market. We've also signed another $20 billion bank for our full suite, with plenty of expansion possibilities. Regarding the go-live slated for the end of next year, there’s a chance we might see it in the fourth quarter, but we need to make more progress on the project, as it may take these institutions a bit longer than others. We are very proud of our team, and this will certainly contribute in 2025. We are excited to partner with this financial institution.

Great job and congratulations on the success. David, I have a follow-up question for you. Regarding the improved free cash flow outlook, could you explain what is behind the stronger EBITDA conversion? Also, is this a good starting point for considering free cash flow conversion in the future?

Yes, Alex. This has been a key focus for us, and last year marked a turning point. We generated around $6.5 million in free cash flow in 2022. This year, our management of working capital has been excellent, both in terms of payables and receivables. We operate as a CapEx-light business, and we've handled our capital expenditures very carefully this year. We believe this 60% should be viewed positively. Internally, it is seen in a positive light, and we plan to continue advancing this into 2024.

And your next question comes from the line of Matt VanVliet with BTIG.

You mentioned that Innovation Studio was certainly key to most, if not all, the wins in the quarter. But curious from here forward, now that you have a lot more customers using it, a number of partners also contributing, is it something that is sort of a meaningful revenue driver in and of itself? Or is this just another key component of the platform to sort of upsell, cross-sell throughout your customer to get more total users and more total usage of the platform?

Matt, it's Jonathan. It is both. I mean we're clearly seeing it impact our net new wins. And obviously, with existing customers, it allows us the opportunity to engage more deeply with them and add these solutions. But the revenue impact is starting to grow. Obviously, a couple of years ago when we went GA with this, we were starting from 0, and now we're starting to see more and more dollars flowing from the economic relationship that we strike with these partners as the banks and their end users sign up for it. So it will be a more meaningful revenue contributor over time. But the strategic value of it obviously goes well beyond the revenue contribution. And I think it's worth mentioning, too, that the revenue we generate from this model is different than historical partnerships, which in this model, is all net revenue. So the margin profile of these incremental dollars is pretty attractive. So it will take some time for this to be very material from a revenue standpoint, but we're starting to see, as I mentioned in the script, that this flywheel is starting to turn. And we're excited about not only the strategic value of it but the revenue implications down the road.

Very helpful. And then when you look at these very largest customers that you've signed both this quarter and in recent quarters, as you go in to add your functionality, are you truly sort of ripping and replacing all of their homegrown functionality? Or are some of these just sort of sitting out in front, being additive, adding those next-gen capabilities but not necessarily going in and doing the most basic sort of blocking and tackling there? So just curious on how big the footprint is and how much sort of future upsell, cross-sell comes alongside of those.

Yes, as I've mentioned, as banks grow larger, their decisions on products for different business lines tend to become more centralized. The commercial division decides on commercial products, while the retail division focuses on retail products. Typically, this involves a complete replacement, as using multiple systems can create confusion for customers. The potential for expansion is significant if we effectively deliver and meet the high standards we've set. The larger deals should be viewed as a single win, with the possibility of two or three more expansion opportunities in areas like relationship pricing or small business, which are favorable for us. Moreover, this reflects our success in offering best-in-class features and functionality; clients are unlikely to switch their commercial customers to inferior products. All of these factors are significant advantages for us. As I noted earlier, the resilience of this business will pave the way as we move into 2024 and 2025, aligning perfectly with the opportunities available. We are currently competing strongly, particularly in the commercial sector.

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

This is Bobby Dee on for Terry. First one, just on renewals. Not sure how much there was in 3Q, but can you talk about renewals and how they're looking in terms of expanded products? Are they increasing usage, paring back, et cetera? And then I had a one follow-up.

From a cross-sell perspective, we experienced over a 20 percent increase year-over-year from the third quarter of last year. We held a significant client conference in May that generates excitement around our new products and offerings, which also leads to contract extensions. Historically, the fourth quarter is a major renewal period for us, and with renewals, there is usually an increase in cross-selling. I am pleased with the performance of our customer success team and the delivery teams, as customers are eager to renew and not switch providers. I anticipate strong renewal numbers this year, especially in the fourth quarter, where there’s a lot to accomplish as many contracts are coming up for renewal. Renewals look promising for 2023, and I believe 2024 will also be strong. Additionally, I expect cross-selling to be substantial during this quarter due to those renewals.

Very helpful. And then any change in the last 90 days associated with length of sales cycles, close rates on large deals, expansion, sales, et cetera?

Thanks, Bobby. Win rates have remained consistent throughout the year, staying within a similar range. We are quite pleased with this and feel very optimistic. In particular, the win rates in the upmarket segment appear to be over 50%. Overall, I have a positive outlook on the win rates.

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

Matt, I wanted to ask you a little bit about fabric here. It seems pretty interesting out of the box. I'm curious in particular to hear who you're targeting with this solution. Is this primarily going to be sort of net new customers that you're going after? Or is it something that will appeal to your existing base of customers?

Yes, I'll have Jonathan answer that question. He's running the business, and he's done the work on this, so I'll let him cover that.

Yes. So Parker, when we think about the initial phase of the go-to-market here, we've received inbound inquiries. In a world where banks and credit unions are really focused on low-cost deposit gathering opportunities in a digital-only channel, we're seeing a lot of inbound inquiries, which is exciting, and that could lead to some net new institutions being part of the initial phase of Q2 Fabric's launch in the market. But candidly, I think the most near term and exciting opportunity for us is within our base. Those are existing Q2 customers where we have strong relationships. We have the digital banking platform up and running in most of those cases. And so that, to us, is where we're seeing the most opportunity and where we think the early phase of this will come from. Over time, I think it will be interesting to see the demand environment and how durable it is because we think this environment is here to stay around the orientation around their deposits. And so net new can be more prevalent over time. But in the near term, we really are focused primarily on the existing customer base.

Understood. Okay. And then on Andi, it's an interesting announcement. I know it's very early days and not in full production yet. But what has the reception been among your customers regarding the generative AI plans you've rolled out? Is it too early to consider monetization, or do you have a framework in place for how you plan to monetize it?

Parker, it's Kirk. I'll take that. Yes, it's a bit early to discuss monetization. However, we can share that we've received a very positive response from our customers when we've demonstrated some of the live code we've developed. It's important to remember that this is built on assets we’ve had in production for quite some time. If we consider Andi within our relationship pricing tool, using that knowledge model alongside enhanced generative AI capabilities, combined with a significant amount of data we possess, these solutions are ready for banks and have been tested to ensure they meet all necessary security and compliance standards. They also address many concerns mentioned by President Biden in his recent executive order. We are optimistic about our position. We showcased this to approximately 125 bankers in Austin last week, and the feedback was very encouraging, as we are tackling genuine and practical issues that currently hinder their operations. A significant example is finding ways to increase the productivity of their commercial bankers by decreasing the time spent on administrative tasks, which can take up 40% to 60% of their day. This gives us a strong starting point, and the bankers had numerous ideas on how to expand from there. For now, our focus remains on the initial beta phase, with several customers already signed up for it. We will keep you informed about our progress as we approach the first quarter of 2024.

Your next question comes from the line of Matthew Roswell with RBC.

It's Matt Roswell on for Dan Perlin. Congratulations on a nice quarter. I have a couple of questions. First, if we could get into the transaction revenue a little bit. Obviously, there's pressure from the macro environment. Do you mind kind of talking about the bill pay sort of pressure there and whether there's still pressure on the transactions associated with the Helix clients?

Sure, Matt. We started noticing some pressures over a year ago, and they have persisted, which we believe is largely due to secular trends. We've observed a significant slowdown in volumes overall. Initially, we expected mid-single-digit growth entering 2022, but instead, we experienced a slight contraction, and this trend has continued into 2023. A big part of this is due to a shift in spending, with many people opting to use third parties and fintechs for bill payments rather than traditional means. These are some of the macro factors contributing to the pressure we’re facing. Additionally, our Helix business has also been impacted by the broader challenges faced by fintechs. Although we have strong relationships with large, financially stable fintech clients, we have seen a decrease in overall transaction volumes from them. This is evident in both our transactional business and our pass-through business, which is included in our services and other categories. These are the main areas where we are experiencing pressure within the Helix division.

Okay. And on the nice revenue mix shift with the subscription revenue coming up, is that a mix of the products or banks being more willing to take a subscription deal as opposed to a license deal? Or are you all just actively pushing banks in that direction?

No, Matt. I mean subscription is really the core solution for us. I mean that is our platform solution. It's recurring in nature. These deals are typically about 5.5 years. And the basis of those deals is typically going to be the subscription itself. So this is the highest margin business that we have of those three, and it's obviously by a wide margin. And the mix-up that we've seen there is a combination of all the strength that we've seen in that platform business, that core digital banking, which we've been talking about, combined with some of the pressures that we've seen in those two other revenue categories. So those two combined are resulting in mix-up. And again, it gives us better visibility into the business and obviously mixes up to higher profit.

Okay. And my final question is the cash conversion has come up nicely as you talked about. Where do you see yourselves deploying that free cash flow going forward from here?

Yes, we have various options for capital allocation that we focus on closely and consistently. We are considering not just the upcoming year but the next three years as well. We have debt to manage that is due in 2025 and 2026. If the market permits, we might explore other opportunities in the future, but for now, we plan to use our cash to reinvest in the business and continue addressing our debt. Looking at 2025 and 2026, we have previously stated that we believe we can manage that debt and pay it off using our existing cash along with the cash we expect to generate.

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

I joined the call late, so I apologize if my questions have already been addressed. However, I would like to explore the cross-sell strategy a bit more. Can you discuss the potential to engage with the existing customer base? This is something you have been working on for a while. Given the range of products and other factors, how do you view the opportunities for cross-selling?

Thank you, Andrew. That's a great question. There are several factors at play. Among the 80 customers we have on digital banking with over $5 billion in assets, many are currently only utilizing commercial or retail offerings and may not be taking advantage of the complete suite of services. This presents a significant opportunity for us to cross-sell additional Tier 1 products. Additionally, our roadmap and innovations, including AI and Fabric, provide us with top cross-sell products like security solutions, Centrix solutions, AI-driven offerings, account opening, and Innovation Studio. We have a vast range of products to cross-sell even to customers engaged in retail, small business, and corporate banking. The key for us is our customer success team building a strategic relationship with clients to understand their needs. We have solutions for almost every requirement, be it securing deposits, addressing loan challenges, managing pricing, or protecting data. I believe we will see a strong fourth quarter in terms of cross-sell and renewals, which will also contribute to new deals. Our average selling prices continue to rise, showing a 35% increase year-over-year. Overall, cross-selling is not only profitable but also creates lasting relationships and differentiates us in the market. I feel very positive about our product maturity, customer experience, and our capability to deliver and support these solutions at a high standard.

That was very helpful. This leads into my next question about product velocity. We previously discussed the tech stack a couple of months ago and the initiatives you're implementing. To what degree does that impact product velocity and the ability to launch new products more quickly? It seems to me that the product velocity has increased recently. I would appreciate your insights on the product pipeline velocity and related aspects.

We aim to combine three key aspects of our product. First, we consider the latest trends in the world, especially innovations like AI and user experience improvements. Then, we look at the features offered by major competitors like Bank of America, Wells Fargo, and Chase, which we need to incorporate. Finally, we focus on the operational efficiency of our business in serving customers. We strive to determine our priorities by aligning these elements. Recently, we had 125 customers in Austin and hosted a client conference with 1,000 attendees who shared the challenges they are facing. Our goal is to understand these challenges and collaborate with our customers to develop effective solutions. Speeding up technology delivery is essential for us. Within Innovation Studio, we have a unique capability to quickly integrate third-party products. Currently, we have 1,400 external developers working on our platform, along with around 150 partners involved in the system. Our commitment to being open and responsive to our customers while solving problems together sets us apart, and we will keep pursuing this approach.

And there are no further questions at this time. This will conclude today's conference call, and you may now disconnect.