Q2 Holdings, Inc. Q2 FY2024 Earnings Call

Good afternoon, everyone. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings Third Quarter 2024 Financial Results Conference Call.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our third quarter 2024 conference call. With me on the call today are Matt Flake, our CEO; Jonathan Price, our prospective CFO; 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, among other things, 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 2024 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 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 our financial results and guidance in more detail. In the third quarter, we generated strong financial results coming in above the high end of our guidance. We generated non-GAAP revenue of $175 million, up 13% year-over-year. We saw continued strength in subscription revenue, which was up 18% year-over-year. And we had another quarter of solid improvement on profitability with adjusted EBITDA of $32.6 million or 19% of revenue and free cash flow of $35.1 million. In the third quarter, we met our previously disclosed goal of achieving Rule of 30 on a total revenue basis by late 2024. In addition to our strong financial performance, we saw broad-based booking success in the quarter, highlighted by a total of 6 enterprise and Tier 1 deals, 3 of which were enterprise wins with top 50 U.S. banks as well as significant bookings contributions from the Tier 2 space. Our sales activity spanned across the portfolio with a variety of digital banking, relationship pricing, and Helix wins, which we executed through a mix of net new and expansion deals. On the digital banking side, our bookings were driven by a combination of our ability to differentiate our offerings by the quality of the retail and commercial experiences and the breadth, scalability, and versatility of our platform allowing us to serve financial institutions at various stages of their digital transformation, whether they're evaluating stand-alone solutions or a comprehensive single platform offering. We had several examples of both scenarios in the quarter. In terms of notable stand-alone win and enterprise, top 50 banks selected our digital banking platform to service the retail customer base. This customer will leverage key components of our recently announced Q2 Engage portfolio, enabling the bank to drive personalization and differentiation in their consumer banking offerings. We believe deals like this underscore the strength of our products and our ability to win in digital banking with some of the largest financial institutions in the industry. And in one of our single platform wins, we landed a substantial deal with a Tier 2 bank that adopted our entire platform for their retail, small business, and commercial segments. This particular win was our largest digital banking deal in the quarter from an ARR perspective, showcasing our continued ability to drive meaningful bookings impact with financial institutions of all sizes. We've also mentioned how Q2 has frequently benefited when financial institutions complete M&A transactions, and this dynamic continues to play out in the third quarter, marking the second quarter in a row where we gained a Tier 1 customer through M&A activity. In this case, the prospective customer acquired a smaller bank, which happened to be an existing Q2 customer, and selected Q2 as the digital banking provider for the newly combined entity. This acquisition resulted in the addition of a Tier 1 bank that will use Q2's full digital banking platform to serve their retail, small business, and commercial customers. We believe this win speaks to the strength and attractiveness of our platform as the digital banking technology of the smaller institution proved to be the preferred solution. We also believe this customer will remain acquisitive moving forward, so we're excited about our potential to grow the relationship over time. We continue to see meaningful net new activity on the relationship pricing side where financial institutions of all sizes are looking to drive profitability of their commercial business. In fact, our largest ARR deal in the quarter came from an enterprise win with a $90 billion bank that purchased our relationship pricing products ultimately replacing a competing provider in their internal tools with Q2. The ability to optimize pricing strategies for both deposit attraction and relationship profitability with our solutions proved to be a key differentiator in this win. We're pleased with the continued momentum we're seeing in the enterprise space on this side of the business. As the deal I just mentioned is also one of our top 5 largest relationship pricing deals of all time based on contractual ARR at the time of booking. Wins like this underpin not only the strength and sophistication of our relationship pricing platform but also the viability of our technology for even the most complex enterprise financial institutions as they increasingly view their relationship profitability as a strategic priority. We're also well positioned to continue capitalizing on expansion opportunities with our existing customers. As we've mentioned throughout the year, we believe our customer base gives us significant opportunity for expansion over time. Our performance in the third quarter illustrated this with balanced expansion activity across our customer base, including notable expansions with Tier 1 and enterprise customers that added products like our risk and fraud management solutions. We had our strongest quarter this year for cross-sale bookings. Q2 Innovation Studio is playing a larger role in driving expansion activity as well. Some of our top cross-sold products in the quarter were generated from our partner ecosystem, showcasing its influence not only in generating bookings but also in driving deeper engagement with our customers. This momentum is also reflected in our innovation studio bookings overall. While the base is still small, bookings from the first three quarters of 2024 have already more than doubled the total bookings achieved in all of 2023. Additionally, the majority of our net new wins in Digital Banking once again cited the innovation studio as a key reason for choosing Q2, underscoring its importance in both customer acquisition and expansion. We believe these trends demonstrate the growing value that our customers see in our breadth of products, while validating our land and expand strategy. Moving forward, our opportunity for expansion, coupled with the value of these bookings reinforces our belief in the longer-term revenue potential within our existing customer base. We also saw meaningful activity with Helix in the quarter, highlighted by a major renewal and expansion with one of our top 5 largest Helix customers and our first fabric win. This significant win was with Envision, a credit union services organization that will utilize fabric to optimize and grow their prepaid card offering across the credit union customer base. As a front-to-back retail tech stack supported by our modern Helix core digital banking front end and expansive partner ecosystem, Fabric allows our customers to pursue their unique growth objectives by helping them easily launch a variety of fee-generating and deposit-gathering services, both of which are top of mind across the industry. And while the Envision partnership is just one example of what customers can do with Fabric, we believe opportunities like this highlight its versatility in helping a broad range of customers facilitate their own use cases to diversify their strategies and differentiate themselves. Overall, our third quarter sales performance demonstrates our sustained ability to capture the market opportunity in front of us. Demand remains strong and we executed against our profitable growth strategy while obtaining our Rule of 30 target in the quarter. Before handing it off to Jonathan to discuss our financials, I'd like to take a moment to thank David for his time at Q2 as Chief Financial Officer. We're grateful for the many contributions he's made to the company over the past 4 years, and I appreciate his dedication to ensuring a smooth transition. And now Jonathan will step into the role of Chief Financial Officer. Jonathan has extensive experience in corporate finance and investment banking, deep knowledge of the fintech space, and has spent nearly 7 years at Q2 working closely with David and his teams while leading key areas of the company, including corporate strategy and emerging businesses. We're excited to welcome him into the CFO position. With that, I'll hand it over to Jonathan to discuss our financial results in more detail.

Thanks, Matt. I would first like to thank David and echo Matt's appreciation for his many contributions to Q2 over the past 4 years. He's been instrumental in ensuring a smooth transition, and we're grateful for the long-term value he's brought to Q2. I'm excited to step into this role as the CFO and build on the great work David and his teams have done as we continue to execute against our profitable growth strategy. With that, let's turn to our financial results for the quarter. We're pleased with our performance across several key metrics, including the achievements in the quarter of our previously discussed Rule of 30 targets. This milestone, along with both revenue and adjusted EBITDA surpassing the high end of our guidance underscores the strength of our business model and solid execution. We've seen robust growth in our subscription-based bookings, which is reflected in our ARR growth. Notably, our subscription revenue in the third quarter accounted for over 80% of our total revenue, highlighting the success of our ongoing strategic shift towards higher-margin recurring revenue streams. Furthermore, we've made substantial progress in our free cash flow generation, which has seen a meaningful year-over-year increase. We believe this improvement in cash flow, coupled with our strong revenue growth and expanding margins, positions us well to continue executing against our 3-year target financial framework. I will now discuss our financial results in more detail and conclude with our updated guidance for the fourth quarter and full year 2024. Revenue for the third quarter was $175 million, an increase of 13% year-over-year and up 1% sequentially. Our total revenue growth was driven primarily from subscription-based revenues, which grew 18% year-over-year and 3% sequentially. As I mentioned earlier, subscription revenue comprised over 80% of our total revenue, highlighting the ongoing shift in our revenue mix towards our highest margin revenue stream. The year-over-year and sequential growth was primarily driven by a combination of new customer go-lives and expansion with existing customers. As a recurring theme we've discussed throughout 2024, revenue from expansion sales, including cross-sold solutions and improved contractual terms, typically materializes more rapidly than that from net new wins. This dynamic has been a key factor in our subscription revenue outperformance throughout 2024. Our services and other revenues declined by 11% year-over-year. As we have mentioned previously, this trend is primarily driven by the reduction in our professional service revenues, which are more discretionary in nature. Given the persistent pattern we've seen throughout the past several quarters, including an average year-over-year decline of roughly 12% in 2024, and our strategic focus on higher-margin growth opportunities, we anticipate these headwinds in our Services segment to persist into the foreseeable future. Total annualized recurring revenue, or total ARR, grew to $796 million, up 15% year-over-year from $694 million at the end of the third quarter of 2023. Our subscription ARR grew to $655 million, up 20% year-over-year from $547 million in the prior year period. Our year-over-year subscription ARR growth was driven primarily from net new customer wins as well as expansion bookings with existing customers. Looking ahead at the fourth quarter, we expect that our subscription ARR growth rate will moderate to somewhere between 12% to 14% year-over-year as we compare against the fourth quarter of 2023, which was our strongest bookings quarter in company history. Our total ARR growth continued to be negatively impacted by the decline in professional services-based revenue we previously discussed. Our ending backlog of over $2 billion increased by $78 million sequentially or 4% and a record $467 million year-over-year, representing 30% growth. The year-over-year and sequential increases were primarily driven by expansion-based bookings, including renewals and additional solutions added by existing customers as well as net new customer wins. In addition, the sequential growth benefited from our best cross-sell quarter of the year as well as continued strength in renewals. As we have mentioned previously, the sequential change in backlog may fluctuate quarter-to-quarter based on the number of renewal opportunities available within that quarter. Gross margins were 56% for the third quarter, up from 53.9% in the prior year period and from 55.7% in the previous quarter. The year-over-year increase in gross margin was driven by an increasing mix of higher-margin subscription-based revenues and increased efficiencies within our delivery and support functions. Total operating expenses for the third quarter were $73 million or 41.5% of revenue compared to $71 million or 45.8% of revenue in the third quarter of 2023 and $74 million or 42.7% of revenue in the previous quarter. The year-over-year and sequential decline in operating expenses as a percent of revenue came primarily from improved scaling of sales and marketing expenses relative to revenue. As a reminder, the sequential decline in sales and marketing expense was primarily a result of our annual client conference, Connect, which impacted sales and marketing expenses in the prior quarter by approximately $1.5 million. We also saw a year-over-year reduction in expenses as a percent of revenue within both research and development and G&A, demonstrating our continued focus on operational efficiency and our ability to scale while maintaining our commitment to delivering best-in-class innovation to our customers. Total adjusted EBITDA was $32.6 million, up 66% from $19.7 million in the prior year period and up 9% from $29.9 million in the previous quarter. We ended the quarter with cash, cash equivalents and investments of $408 million from $372 million at the end of the previous quarter. We generated cash flow from operations in the third quarter of $43 million driven by improved profitability and continued effective working capital management. For the quarter, we also generated free cash flow of $35 million, resulting in free cash flow year-to-date of $70 million, which is up meaningfully year-over-year from the $10 million generated through the first 9 months of 2023. We now expect our free cash flow as a percentage of adjusted EBITDA for the full year to be over 70% for the full year of 2024, significantly exceeding our initial expectations heading into the year. Let me wrap up by sharing our fourth quarter and full year 2024 guidance. We forecast fourth quarter non-GAAP revenue in the range of $178.1 million to $181.1 million, resulting in full year non-GAAP revenue in the range of $691.5 million to $694.5 million, representing year-over-year growth of 11% for the full year. As we approach the end of 2024, we expect our full year subscription revenue growth to reach approximately 16% year-over-year, significantly outpacing our initial projection of 13% for 2024 that we made a year ago. This substantial full year outperformance reflects the consistent strength of our expansion-based bookings and successful new customer go-lives throughout 2024. This acceleration in full year subscription revenue growth reinforces our confidence in our 3-year annual average subscription revenue growth target of 14%. And looking ahead to 2025, we continue to anticipate full year subscription revenue growth to be approximately 15%. We forecast fourth quarter adjusted EBITDA of $34.3 million to $36.3 million and full year 2024 adjusted EBITDA of $122 million to $124 million, representing approximately 18% of non-GAAP revenue for the year. In conclusion, our strong third quarter results and updated full year guidance showcased the durability of our business model and our solid execution. Highlighted by achieving the total revenue Rule of 30 target we shared at the beginning of 2023. Our performance marked by subscription revenue growth exceeding expectations, enhanced operational efficiency, and accelerating cash flow conversion demonstrates significant progress towards our 3-year financial targets. We remain dedicated to delivering growth, profitability expansion, and improved capital efficiency and believe that our results to date collectively illustrate our progress and potential as we continue to evolve our business and drive shareholder value.

Thanks, Jonathan. In closing, we rounded out a great third quarter with strong financial performance and solid sales execution across the business. On the sales front, we saw a broad mix of bookings success with Tier 1 and Tier 2 customers highlighted by multiple enterprise wins with top 50 U.S. banks. We continue to land a combination of net new and expansion deals within digital banking, relationship pricing, and Helix, including our first fabric win and one of our top 5 largest relationship pricing deals of all time. We believe our sales performance in the quarter reinforces our competitive differentiation and our ability to capitalize on a range of opportunities across our lines of business. On the financial side, our results exceeded the high end of our guidance, and we continue to deliver improved profitability in accordance with our long-term financial targets, enabling us to achieve our Rule of 30 target in the third quarter. As we begin to close out 2024 and look ahead to 2025, we're confident that we'll continue to drive shareholder value with our strong product portfolio, solid sales execution in terms of both net new and expansion opportunities and our proven ability to execute against our profitable growth strategy.

We'll go first to Dan Perlin, RBC Capital Markets.

Great quarter. I wanted to explore your subscription AR and backlog, which have accelerated year-over-year and also on a sequential basis. Matt, could you elaborate on this and discuss how some of these deals are evolving? It seems you're winning larger banks and financial institutions, and the types of deals you're signing appear to be more comprehensive within your product portfolio. If you could provide more details on that, it would be appreciated.

Yes, Dan, we continue to be pleased with the demand environment out there. Deposits are critical for everybody, and our system drives retention, acquisition, and growth of those deposits. And then our relationship pricing product, it's not a rate-sensitive product, but it's a much more complex environment to price relationships. And so you're seeing the $90 billion bank we signed, I would say that upmarket on the enterprise and Tier 1 deals, they get one product in and they continue to expand with more products down the road. If you consider our business, we have 100 customers that are Tier 1 clients with revenues over $5 billion, and more than half of them currently only use one major product SKU. This indicates significant potential for growth within that group. Additionally, we have 230 clients with revenues greater than $5 billion who are not utilizing digital banking, and a larger proportion of them also have the opportunity for expansion. So there's a lot of opportunity there as well. As far as we talked about the mix being different in '24 than it was in '23. As I sit here today at the end of the third quarter, we've signed almost twice as many deals in '24 at the same time as last year at this point. So demand environment remains strong, and we talked about the Tier 2 that bought the whole suite of products. We're seeing that happen in the Tier 2 and Tier 3 space where they do buy a more robust set of products. But really happy with the demand environment, and we think it sets up for a nice fourth quarter as well. So just pleased with the execution of the sales team and the ability to close these deals.

Yes, it seems like you are continuing to gain momentum. Following up on that, as these wins become larger and more comprehensive deals, and considering the current size of the backlog, are there any concerns that the implementation teams might need to be strengthened? I understand you usually provide the timeline for these rollouts, but I wonder if the scale of these deals might catch some companies by surprise.

Yes, Dan. It's a fair question. And in the history of 20 years of the business, we have been caught off guard, but our implementation sales and finance organization work very closely on demand and capacity planning and I don't anticipate any problems like that in '25.

16% subscription revenue growth this year at least 15% next year and then compares to your long-term targets? Any way to think about kind of the trajectory there?

Yes, Cris, it's Jonathan. I'll take that. So yes, as we've said on the call, we feel really good about the performance. In particular, that 16% relative to the 13% we sort of saw and provided as guidance coming into the year. We've really seen overperformance in particular, when it comes to cross-sell, when it comes to the renewals that we've seen, both in terms of the economics we're getting on those renewals, but also how we pulled in renewals out of scope from the year, which has helped the performance. And so that's really led to the overachievement that you're seeing in that first year, the 16%. And then as we think about the 15% sitting here today, obviously, we still have a fourth quarter that we're looking at, that hopefully will be strong on the cross side, too, so have an impact there. And then we'll give more color around what the shape of it from a 2026 perspective looks like on the February call. But all-in-all, sitting here today, feel really good about the dynamic and just got to continue executing at a high level, but very, very pleased with the results to date. Yes, definitely. So I would say from a philosophical perspective, very much continuing down this path of profitable growth, and we're still early days when it comes to a lot of the execution. And I know we've seen a lot of progress in terms of the profitability of the business, but we still feel like we have a long way to go. And we want to do that while we're maintaining an elongated runway of the type of growth profile that you're seeing from us. So really, it's around continuing down this path of profitable growth. We're going to invest in areas that help maintain and drive our leadership position in the market. And we've talked a lot about it, but you see in the call today, the cash flow position of this company is strengthening. That leads to a stronger balance sheet, and that's really going to be a priority for us as we continue to strengthen the balance sheet and put the company in a strong position to, over time, be in a position to strategically act where there’s opportunity.

This is Bobby Dee on for Terry. So you all continue to report great success coming in on the winning side of M&A. I'm curious, what are your expectations for the bank M&A environment heading into next year? And how big of a tailwind is M&A for growth in a normal or elevated M&A year? And then I have 1 follow-up.

Yes, it's hard to predict what's going to happen. Generally, the expectation is that M&A activity will increase in '25. There is a backlog of deals waiting to be addressed. I don't want to forecast too much, but I anticipate that activity will pick up after the tax season, leading to more deals, which historically has had a 90% win rate for us in retaining customers and acquiring new ones. We had a great story that I mentioned in the prepared remarks around smaller financial institutions acquired by a bigger one, and they adopted our platform. So not sure what that number could look at whether that's going to be a one-off or more common, but the platform is highly differentiated, and I think you'll see it pick up.

Yes. I would just say we're examining the deals that are out there that are in backlog. The way I think of it, though, is you have a real-time lag between when the deal is announced to when it closes to when the migration would occur, and then you have the opportunity for one-time services dollars and then depending on the negotiation and the nature of the contract in terms of their user counts, there's opportunity for upside on the subscription side of the equation as well.

Great. And then secondly, we've seen various reports on private company vendor challenges in the space. Have those been a driver of pipeline or new booking success in 3Q? And how do you see the competitive landscape evolving going forward?

Yes. I mean, there's plenty of examples of people that struggle to get the product live. They try to do different new entrants and features and functions, especially on the commercial banking side, which are the crown jewels of our customers, the banks and moving those customers is very risky. Our ability to point out 100 customers, more than $5 billion, we've converted on every core from every system, multiple times. Customers are happy, they're referenceable for us. So it's a tough business. The integrations are tough. The customer experiences stuff, the conversion stuff. It just takes time to get there. And so we see some cases of some private companies struggling, and then also some of the larger historical players have a lot of different businesses that they're running right now, and they don't wake up every day thinking about how they're going to build an amazing digital experience that can drive deposits and stickiness and a real experience that makes somebody feel the bank's brand as they're interacting with it, which is what's a big part of digital banking is you've got to drive an experience that the bank gets credit for. We do that really well.

Jonathan or Matt, regarding the subscription bookings, I appreciate the insights on the challenging comparisons. Could you provide more details on what you are observing in the macro or late-stage pipeline as we approach what is typically a stronger quarter? What are some factors affecting the potential seasonal strength in Q4?

Yes. I anticipate Q4 being a strong quarter. It's a tough compare when you signed the 2 biggest deals in the history of the company in Q4 of '23, obviously, and that was a historic quarter, but I anticipate having a strong quarter. We've got to go execute. We've got to win those deals. But I would anticipate it being the biggest quarter of the year for us and feel really good about our ability to execute on that.

I would just add that it's important for investors and the audience to understand that the Q3 number was very strong regarding subscriptions. We wanted to clarify the reasons for the pressure in Q4, which is purely due to a tougher comparison. Q4 '23 versus Q4 '24. I feel really good about the fourth quarter trajectory. As Matt said, we've got to go execute. But that 12% to 14% gives some directional guidance around how to think about it relative to Q4 of '23 and then also puts into framing how to think about the subs growth in '25 that we provided. Yes. Great question. So as I mentioned, I think there's still a lot of work to do on some of the basic blocking and tackling and then I think we have lots of opportunity to continue pushing them all forward on new opportunities. So one of the things I'll call out, as I mentioned in the prepared remarks, we crossed the threshold of 80% subscription mix. And while we've made tremendous progress in that from just looking back a year or 2 ago, we still think there's more to go there. And so that will certainly be one of the contributors, maybe not to the degree you've seen over the last 2 years in terms of the expansion, but we still see that mix shift continuing through '25 towards subscription, which will have a positive impact on margin. The other thing that we're seeing, as I mentioned on some of these renewals, is we're doing a really good job when it comes to pricing and packaging and ensuring that we're getting the value of our platform in these renewals. And so really, like new strategies, new trying new opportunities when it comes to how we think about pricing and demonstrating the value of the platform at the point of renewal. We talked about efficiency when it comes to delivery, support, our upgrade process. And then I think David and the team have done a great job down the path of some basic sort of OpEx opportunities when you look at how strong our bad debt numbers are optimizing our facilities footprint and procurement maturation.

Just curious on the innovation studio side. I think you said doubled year-over-year. What your view is driving that, right? Is it just more partners being added? Is it because it's being referenced in almost every new deal, it's more new logos that are bringing on partner products are you educating folks more? Just curious what's driving that momentum?

Yes, it's a great question, and I'll take this just given the recency of the transition. The net new side has an impact, and we're certainly trying to educate our prospects and soon-to-be customers earlier so that they can think about adoption sooner and right into the go-live. But the traction that you're seeing that was mentioned on the call is primarily driven from existing customers and then doing a better job of promoting these solutions to their customers. where that's the model in the marketplace, for example, and candidly, just taking up more of these products as the familiarity with the model and the value proposition is becoming more and more clear. So because you're coming off a small base, I don't want to over-rotate to the magnitude that we talked about but it is still very early days in the adoption cycle. And so we think there's still a lot of room for the existing customer base to take on more products and demonstrate the value of those products to their customers which ultimately is what will drive the value proposition for all the parties involved here. The short answer to your question is that it is mostly driven by existing customers. Yes, I’d like to add a little more detail on the services side here. Fully recognize the headwinds there. We are anticipating to see some opportunities for recovery, potentially tied to broader trends in Main Street and consumer spending which can drive some increased services demand. I would say more generally that as the economic environment stabilizes, we might see more discretionary spending than we've seen over the past couple of years.

Is James Foster on for Michael. Wanted to ask really quickly on one of the CFPB rules that came out 1033. It would be great to get your perspective on that ruling and the feedback you've heard from our customers. And I guess we're wondering if this could be a driver of incremental attach of some of your Centrix risk and fraud capabilities?

Yes, it is still a bit early, but I would like to emphasize that we have extensive experience with all the integrations due to numerous cores and the legacy technology integrations we have. We standardize and map accounts, historical transactions, and all real-time and scheduled transactions that are relevant to open banking, as well as our customer profile. The implementation and integration of this across the industry are still to be determined. Although the rule is now in place, we need to see how it will unfold from a technical standpoint and understand what is required by different institutions. But we feel like we're in a really good spot to be able to help our customers and their customers. With that, certainly the broad space is going to be a key ingredient of this because you don't want people to be able to just be moving their accounts around without accountability for making sure that that's being done in a safe and secure way. We do a lot of that for our customers today. There's no reason we wouldn't see doing that in the future, but still a lot to be learned about how it's going to get done and out there in the field, so to speak.

I would say there has been a really good response to our premium treasury pricing, particularly from some of our largest precision longer customers, which is very encouraging. However, establishing pricing in commercial relationships is quite challenging and significant. It requires everyone's full commitment. You cannot simply price the loan aspect correctly; you need to consider the entire relationship. As a result, we continue to notice strong demand for that. We believe the conditions will remain favorable for that because although funding costs are beginning to decrease slightly and many people are adjusting their deposits as interest rates decline, it is crucial to balance that with fee income. There are some positive trends in that regard.

I was curious and wanted to explore a bit deeper into the discretionary spending of banks and its impact on services. Could you provide more details on the breakdown of the approximately 11% to 12% year-over-year decline, specifically how much is influenced by your decision to deemphasize certain products versus demand?

Let me give a little bit of color. We don't disclose the breakdown, but what I'll tell you directionally, when you think about the services components, the consulting engagements, consulting-like engagements, what we call Premier or integrated services is certainly the largest component of the bucket, but still under 50%. Then you have our implementations, which more tracks the bookings performance, so more control or more tied specifically to how they spend on digital. And so that will be more significant for the trajectory regarding the revenue profile. Additionally, we have other services, one-time engagements, and smaller dollar opportunities that are included in that total, as well as what we refer to as services and others, which encompasses the pass-through on the Helix business. So that's the total bucket. And again, that largest bucket, still sub-50% is where we're feeling this pressure where we can we clearly call it discretionary and we don't really have control over the spend dynamics from a bank perspective.

I think on balance, our customers are a little bit more optimistic than they were a year ago. And so that's good as they're going into their budget season and finalizing all those things. But that doesn't mean to Jonathan's point, that there's going to be some huge wave of demand for the services. We're going to certainly manage that from our side as well in terms of what's the right fit for us. We need to focus on our own approach rather than what other providers might do. We'll handle that with care. We believe there's still a favorable balance as we welcome new customers, but we also recognize that the transition might be uneven for a while as they move into the next year.

The next question is Michael Infante, Morgan Stanley.