Earnings Call Transcript - QTWO Q1 2024

Operator, Operator

Good afternoon. My name is Pam, and I will be your conference operator today. I would like to welcome everyone to the Q2 Holdings First Quarter 2024 Financial Results Conference Call. I will now turn the call over to Josh Yankovich, Investor Relations. Sir, please begin.

Josh Yankovich, Investor Relations

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our first quarter 2024 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, 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 first 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 have also published additional materials related to today's results on our Investor Relations website. Let me now turn the call over to Matt.

Matthew Flake, CEO

Thanks, Josh. I'll start today's call by sharing our first quarter results and highlights from across the business. I'll then hand it over to Jonathan to discuss our strategy and emerging businesses. David will then discuss our financial results and guidance in more detail. Our financial results in the quarter outperformed our expectations, getting us off to a strong start towards the long-term financial targets we shared in February. In the first quarter, we generated a total non-GAAP revenue of $165.5 million, above the high end of our guidance. We also continue to deliver on our commitment to improve profitability in the quarter with adjusted EBITDA of $25.2 million, also above the high end of our guide. And for the first time, we generated positive free cash flow for the first quarter of a year, a total of $6 million, demonstrating continued improvement in our financial profile. In addition to our solid financial results, we continue to see strong demand in the first quarter with notable activity across net new expansion and renewals. We signed a broad mix of deals across asset tiers, highlighted by a greater number of total Tier 2 and 3 deals compared to any quarter last year as well as 4 Tier 1 digital banking deals in the quarter. Two net new and two that were meaningful expansions. Our single platform value proposition was a common theme across all four of these Tier 1 digital banking wins. On the net new side, we won an opportunity with a $20 billion bank that will consolidate from multiple disparate incumbent digital banking solutions and use Q2 for retail, small business and commercial. The second Tier 1 win was a retail digital banking deal with a $10 billion bank, demonstrating that our platform remains highly differentiated even in significant retail-only opportunities like this. And because of our single platform value proposition, we expect to compete for the commercial business over time. On the expansion side, we had significant wins with two existing Tier 1 customers that started with one component of the platform, either retail or commercial and purchased the other during the quarter. These deals represent just how valuable our expansion opportunities can be with one of them more than doubling the expected revenue contribution from that customer. I want to take this opportunity to talk about the unique position Q2 is in for continued expansion with our customers. And why wins like the two I just mentioned are playing an increasingly important role in our bookings performance. Starting with our first line of code 20 years ago, we built a true single platform for retail, small business and commercial. Today, this approach remains tremendously valuable to our customers for a few reasons. First, it makes our customers more competitive by upgrading them to a best-of-breed solution while unifying the user experience across customer segments and devices. And because they can add features from across the platform, it lets them grow with their account holders. So if a retail end user now requires business functionality, they can provide it without having to move them to a different system with a different login and experience. It also helps our customers with vendor consolidation, allowing them to operate more efficiently. By moving to a single platform, they can consolidate from multiple systems and vendors down to one and use one set of code to roll out new capabilities. And finally, it helps innovation occur faster, centralizing our customers' data and integrations, making it easier to maintain, to take upgrades, and to add new products and services. Key elements of our product portfolio, such as Q2 Innovation Studio and our artificial intelligence capabilities are enhanced because we have this unified platform. For Q2, we believe our single platform drives competitive advantage by improving our ability to land and expand. Due to the various legacy systems that financial institutions often rely on, our customers frequently start with one major product set from us. But once they've converted to Q2, it becomes easier to add product sets through the expansion of our platform. One of our Tier 1 expansions from the quarter is a particularly good example of this, an $8 billion five bank holding company that originally adopted our commercial digital banking solutions will now add our retail solution to their platform in addition to the improved user experience associated with the single platform. The customer will also drive operational efficiencies by consolidating from five separate bank instances to serve their retail users into a single instance for both lines of business. When you pair our platform with the breadth and strength of our customer base, we believe our expansion opportunity only becomes greater. We have approximately 1,400 total customers. To put our expansion potential into perspective, I'll illustrate the opportunity we have within our Tier 1 customer base alone. We have 90 Tier 1 customers using the digital banking platform, and less than half of them are using both retail and commercial solutions. On top of that, we have another 130 Tier 1 customers who are not using our digital banking platform. A portion of our customer base that we believe presents great expansion opportunity. So while our net new sales performance has been strong, and we're optimistic about our pipeline through the remainder of the year, we anticipate this expansion dynamic to continue playing a key role in our overall bookings performance going forward. Outside of digital banking, our Centrix risk and fraud and relationship pricing teams continue to drive notable sales activity for the business. We had two significant Tier 1 relationship pricing renewals in the quarter. And on the Centrix side, no matter what's happening in the economic environment, fraud remains top of mind for our customers. Our Centrix products, which help them manage risk and compliance, particularly in the commercial banking space, are regularly among our top cross-sell products. In Q1, we saw over 50% growth in Centrix expansion bookings year-over-year. So in summarizing the quarter, I'd reiterate the strength of our financial performance, which outpaced our guidance in terms of revenue and profitability. Our continued momentum on the net new side with a demand environment that we believe remains strong as we look at the rest of 2024 and a single platform with a broad, diverse customer base that puts us in a unique position to expand our existing relationships as a complement to our net new sales execution. With that, I'll hand the call over to Jonathan to cover some updates from across our emerging businesses, where Q2 Innovation Studio and Helix are also playing a crucial role in deepening our customer relationships.

Jonathan Price, Executive Vice President of Strategy and Emerging Businesses

Thanks, Matt. I'll start with Q2 Innovation Studio. As Matt mentioned, the fintech partner ecosystem we've built through Innovation Studio has become a critical part of our story, whether in winning net new deals, where it was a key driver in every net new win in the quarter or in terms of expansion, where it's helping our customers unlock new business outcomes and in turn, strengthening our existing partnerships in ways that go far deeper than a typical incremental product expansion. I'll share a quick customer story to demonstrate this dynamic. We have a Tier 1 bank that's been a Q2 customer for over ten years. And like many financial institutions today, they are laser-focused on acquiring a new generation of customers. The bank believes that embedding best-in-class fintech partners will be a key part of that strategy, and they are using Q2 Innovation Studio to rapidly deploy partner solutions integrated into their Q2 digital banking platform that will help them create a better user experience, reduce friction and meet the next generation of customers where they are. One partner the bank has deployed provides a digital customer support platform, providing AI-powered self-service and virtual chat capabilities, along with the ability to offer real-time dedicated banking guidance much like a traditional banker would in the branch, right inside the digital banking experience. The rollout of this partner has had a significant impact for the bank. Customer adoption has been incredible with minimal marketing on the bank's part. More than 20,000 of their customers are using the new solution. Those customers are now resolving a majority of their typical customer support issues using the virtual chat, which has had a direct correlation with the reduction in call center volumes. These gains have enabled the bank to rethink how they allocate their customer support functions, reducing time spent in their traditional call center and increasingly focusing on digital support and more strategic areas of their business. This is just one of many fintech partners the bank has launched to sharpen their value proposition and deepen digital engagement with their customers, both on the retail and commercial side. For example, they've used multiple partners to provide commercial payment capabilities and have achieved more than a 40% growth in payments volume processed by these solutions when comparing the first quarter of 2024 with the prior year period. They've used another fintech partner to drive approximately 130% growth in international FX payments over the last 12 months, which is a critical offering in recruiting new commercial customers that also drives revenue for the bank. Beyond the customer experience, the overall impact on their business is impressive too. Through revenue share and cost efficiencies, they offset approximately 50% of their total digital banking costs in 2023. When you consider stories like this, it's easy to see how Innovation studio helps drive renewal and expansion activity. It allows our customers to rapidly deploy best-in-class fintech solutions from a marketplace of more than 160 partners, and helps them drive deeper engagement across a broader product suite and it has the potential to offset the cost of their technology investment with us over time. Shifting gears to Helix, we have some quality wins in the quarter, including a net new fintech win and a meaningful program launch that I'll expand on briefly. In our February call, we mentioned a fintech win that was a competitive takeaway. In the first quarter, just a few months later, we successfully converted and launched that customer's users on the Helix platform. We are very pleased with the speed of this launch. Not only does it demonstrate the flexibility and strength of the Helix technology, but also our team's ability to successfully launch programs and more specifically, conversions off another platform. Our successful launch with this customer is a particularly useful proof point for us in the market as the current backdrop continues to put pressure on the broader banking as-a-service landscape. Additionally, this customer is the first to launch with the Bank of Record partner that we announced in the third quarter of last year, which means we were able to stand up the Helix platform, successfully launch its first program and start bringing revenue to the bank in roughly 6 months, about half the time it took us historically. As we continue to increase our focus on taking Helix to financial institutions, we believe that our ability to configure and deploy the Helix platform quickly and seamlessly alongside a bank's existing technology stack will be an important differentiator for us. With that, I'll hand the call over to David to discuss our financial results from the quarter.

David Mehok, CFO

Thanks, Jonathan. We started 2024 with a strong quarter. Bookings drove meaningful subscription ARR and backlog growth. We delivered revenue and adjusted EBITDA results above the high end of our guidance and for the first time in company history, we generated positive free cash flow in the first quarter of the year despite normal seasonal cash flow headwinds. I will now discuss our financial results in more detail and conclude with our updated guidance for our second quarter and full year of 2024. Revenue for the first quarter was $165.5 million, an increase of 8% year-over-year and up 2% sequentially. Our total revenue growth was primarily from subscription-based revenues, which grew 13% year-over-year and 4% sequentially. The year-over-year and sequential growth was driven by new customer go-lives, strong expansion sales with existing customers as well as improved renewal economics. Typically, these expansion sales have a quicker time to revenue and are accretive to gross margin. The stronger renewal performance we are seeing is a continuation of the renewal strength we saw in the second half of last year. As we more effectively capture the value we deliver to our customers and extend contract duration. As expected, our services and other revenue declined both sequentially and year-over-year, driven by continued pressure on the size and scope of our professional service engagements, which are more discretionary in nature. We do expect the magnitude of the year-over-year decline in services to improve throughout the year. But as mentioned previously, we continue to expect to see contraction going forward in this lower margin revenue stream due to the macroeconomic factors and financial pressures our customers are facing. Transactional revenue increased by 5% year-over-year and 7% sequentially, largely driven by Helix-based revenues associated with higher seasonal usage. Total annualized recurring revenue or total ARR grew to $761 million, up 13% year-over-year from $672.7 million at the end of the first quarter of 2023. Our subscription ARR grew to $615.1 million, up 18% year-over-year from $521.3 million in the prior year period. Our year-over-year subscription ARR growth was positively impacted by net new renewal and expansion-based bookings with total ARR growth partially offset by a decline in professional services revenue. Our ending backlog of approximately $1.9 billion increased $83 million sequentially or 5% and $387 million year-over-year or 25%, which is the largest year-over-year dollar increase in company history and the highest year-over-year growth rate we've seen in over three years. The year-over-year and sequential increases were partially driven by renewals as well as expansion bookings as our customers added new solutions and extended contract durations. In addition, our year-over-year growth was positively impacted by consistently strong net new bookings performance over the last twelve months. As we mentioned previously, the sequential change in backlog may fluctuate quarter-to-quarter based on the number of renewal opportunities available within a given quarter. Gross margins were 54.9% for the first quarter, up from 54% in the prior year period and down from 56% 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. The sequential change in our gross margin reflects the incremental implementation expenses recognized in the first quarter associated with the delivery of a high number of go-lives, which were more than in any single quarter in 2023. Sequential margins were also impacted by a seasonal increase in payroll taxes and 401(k) matching expenses due to the timing of annual bonus payments and the reset of taxes and 401(k) matching eligibility. Looking ahead, we anticipate continued year-over-year improvements in gross margin for each subsequent quarter and the full year. Total operating expenses for the first quarter were $72.8 million or 44% of revenue compared to $72.5 million or 47.4% of revenue in the first quarter of 2023 and $74.8 million or 46.1% of revenue in the fourth quarter of 2023. The year-over-year and sequential reduction in operating expenses as a percent of revenue was driven primarily by better scaling of sales and marketing expenses relative to revenue as we continue to drive improvement in our cost of acquiring new revenue, which is partially attributable to lower costs associated with expansion bookings. The sequential decline was impacted by approximately $1 million based on the seasonality of customer events, which are more pronounced in the fourth quarter. As a reminder, in the second quarter, we will be hosting our customers and prospects at Q2 Connect, our annual conference which will have an approximate $1.5 million impact sequentially on sales and marketing expense. Total adjusted EBITDA was a record $25.2 million, up from $16.5 million in the prior year period and $23.2 million in the previous quarter. We ended the year with cash, cash equivalents and investments of $338.5 million, up from $324 million at the end of the previous quarter. We generated cash flow from operations in the first quarter of $13.4 million, driven by improved profitability and continued effective working capital management. For the quarter, we also generated free cash flow of $6 million, marking a breakthrough from the historical pattern of negative free cash flow during our first calendar quarter, which carries seasonally higher cash costs associated with our annual bonus and end of year commission payouts. As we mentioned previously, we continue to expect free cash flow as a percentage of adjusted EBITDA to be over 60% in 2024 with a target of continued expansion thereafter. Let me wrap up by sharing our second quarter and full year 2024 guidance. We forecast second quarter non-GAAP revenue in the range of $169 million to $172 million. And full year non-GAAP revenue in the range of $686 million to $692 million, representing year-over-year growth of 10% to 11% for the full year. We also anticipate subscription revenue growth for the full year to be at least 14% above the initial outlook we had six months ago, driven by better-than-expected expansion and renewals bookings as well as the organic growth we've seen to start the year. We forecast second quarter adjusted EBITDA of $26 million to $28 million and full year 2024 adjusted EBITDA of $110 million to $114 million, representing approximately 16% to 17% of non-GAAP revenue for the year. In summary, we had a great start to the year, building on the momentum coming out of 2023 and with continued strong growth in subscription ARR and revenue as well as adjusted EBITDA results above the high end of our guidance. Our first quarter performance and projections for the remainder of the year give us the confidence to lift our full year outlook and reiterate our expectation of hitting our Rule of 30 target on a total revenue growth basis in the back half of the year. Looking beyond this year, with the continued progress on our profitable growth strategy, the quality of our pipeline and substantial opportunity afforded to us to continue to expand with our existing customers, we believe we're well positioned to continue executing towards the long-term targets we communicated last quarter.

Matthew Flake, CEO

Thanks, David. I'll conclude by reiterating a few key takeaways from the quarter. First, we continued our sales momentum with a broad mix of net new and expansion wins. The two Tier 1 digital banking expansion wins from the quarter demonstrate the unique opportunity we have to deepen our existing relationships because of our single platform and large, diverse customer base. Given the strength of the demand environment, the state of our pipeline and our recent win rates, we're optimistic about the remainder of the year. Our emerging businesses continue to execute well, and we saw key sales and renewal contributions from our Centrix risk management and relationship pricing solutions as well. Finally, we delivered financial results that outperformed our expectations while also achieving positive free cash flow for the first time in the first quarter. These results represent a promising start towards achieving the three-year financial targets we shared in February and underscore my confidence in the opportunities ahead of us. Thank you, and I'll hand it over to the operator for questions.

Operator, Operator

And your first question comes from the line of Alex Sklar.

Alexander Sklar, Analyst

Great. Matt, just to start with you, I appreciate all the expansion opportunity comments and the excitement around that. I know a lot of your customers are probably on multiyear contracts for some of the solutions you're trying to expand with them on. Has anything changed in terms of their willingness to look at Q2 solutions earlier in their contract cycles and not worry about timing just given renewed emphasis around deposits and efficiencies that they can gain around a single platform?

Matthew Flake, CEO

Yes. Thanks, Alex. Well, the contracts for the SKU that they're running. And so what happens particularly in the larger deals is they buy their retail solution, it takes a year to deliver. We deliver. They have a good experience and then they kind of get the team together on the commercial side or on precision lender or one of the larger SKUs and say, let's go look at this to take advantage of all the stuff I talked about there about the single platform. But the advantage to us is you have a master services agreement with them. You had a good experience on the conversion. They begin to know how you work and they want to do the expansion with us. And so that's really why we highlighted that in the call, which is, as we talked about, we have 220 customers that are greater than $5 billion in assets, and 40% of them are only running one of our large SKUs. So they can go buy any of these products at any time. It's more about the capacity they have to project manage and the organization ready to do it. It's a tremendous opportunity, and I appreciate you asking the question because we wanted to make sure we articulated it to the shareholders.

Alexander Sklar, Analyst

Okay. Great. And David, just maybe a two-part question for you. Last quarter, you kind of called out the largest delta between booked and implemented ARR that you've had in some time. Just with another quarter past, can you update us on the visibility of getting that ARR live? And then the second part here, just given the comments of some of these expansion bookings and faster time to revenue, is there any change that we should think about in terms of the percentage of your bookings on average that can impact revenue kind of in year or faster?

David Mehok, CFO

Yes. Sure, Alex. I'll take the first one and then move on to the second. On the ARR, now live. So last quarter, if you remember, one of the things that we conveyed, and we sort of gave this in the context of the overall ARR commentary, was that 18% of that wasn't live. That number is now down to 15%. But two things to keep in mind. The first one is Q4 was a record bookings quarter, and we talked a lot about the momentum that continues into Q1. But Q4 is seasonally large and that's part of the reason why you saw so much of that now live. The second part of that is that 15% number is still the second highest we've seen in years. So we're still at a really high percentage of our overall ARR base that is not in the ground yet. So that's great news for us in terms of visibility. It's great news for us in terms of what we've already told you in terms of those long-term projections. The second question, I think, was around what percentage of our bookings do we see current year. The easiest way to think about that is to bifurcate net new and cross or expansion. On the net new side, anything that we do going forward for the rest of the year, you're going to see very little revenue. As you know, the implementation cycle, depending on the size of the deal, can be anywhere from 9 to 15 months. Conversely, on the cross or expansion side of things, we're seeing a lot of strength, and the time to revenue for that is quicker. But you still do see, let's say, 4 to 9 months depending upon the types of expansion solutions that we have. So we'll see some of that revenue, but the majority of it is going to come in the second half of the year. The one that we do see immediate time to revenue is some of the expansion opportunities we have with specific licenses for our solutions. We did see strength, quite frankly, in Q1, and that's part of the revenue upside that you saw in what we delivered.

Operator, Operator

Your next question comes from Terry Tillman.

Terrell Tillman, Analyst

Congrats from me as well. I'll keep it to two questions. The first question is, I like all the color in terms of the $3 billion ARR opportunity in the $90 million and the $130 million. I don't know if this is for you, Matt, or whoever else, but I wanted to probe on the 90 Tier 1s, I think you're only using one of your two digital banking sides of the house and then the 130 Tier 1s that actually don't use any digital banking. As you look out at your pipeline and how you've got your go-to-market targeting, what of those two sets seems the most actionable near term, again, the $90 million or the $130 million? Any commentary you could share on that? And then I had a follow-up for Jonathan.

Matthew Flake, CEO

Yes, Terry. I would say that about 90% of those are likely actionable because they are utilizing either our retail or commercial banking services. What we are currently observing, as I mentioned earlier, is that these banks are seeking efficiencies and aiming to enhance their digital experience. When a bank is using our retail product and wants to include commercial services, they do not need to deploy a completely new system or learn a different back office; our existing system can accommodate this. It involves activating those features as needed and transitioning the customers. This process provides significant efficiency gains for the bank or credit union. Those scenarios are where we are experiencing a high demand. For example, two of the Tier 1 banks we signed recently added both retail and commercial services through cross-sells. These represent the opportunities we see, but it does not mean we are neglecting the 130 banks focused on cross-selling and retail products, corporate services, precision lending, and fraud solutions. There is substantial potential in that area. We have a strong customer foundation; the top 100 Forbes banks were recently announced, and 58 of them are our customers. We boast a solid customer base, arguably the best among North American financial institutions, and the fact that 58 of the top 100 Forbes clients utilize our technology highlights a significant opportunity for growth through cross-selling. We are genuinely enthusiastic about these prospects.

Terrell Tillman, Analyst

That's great, Matt. Jonathan, regarding Innovation Studio, the example you shared about one customer generating over 50% of their contracted platform value through fees is interesting, especially since you have over 160 partners and you're still expanding. How are you approaching monetization? It appears you're delivering value to both your end customers and your partners. Can you provide any specifics on how Innovation Studio is being monetized or how you envision it evolving in the next few years?

Jonathan Price, Executive Vice President of Strategy and Emerging Businesses

Yes. Thanks, Terry. The way I think about it is, whether it's in the Accelerator program or the marketplace, we strike a revenue share with each of the partners for any deal they do in the marketplace; we share in that revenue with the financial institution. From the partner's lens, they're accessing our channel of 450-plus financial institutions that are live on digital banking today, 23 million end users on that platform that log in 5 billion times a year. They're getting access to a pretty compelling channel with one integration to go and deliver their solution. For them, the alternative of going one-to-one across the financial institution landscape in the U.S. is a daunting task. They really do value the channel, and we have partners where we represent a meaningful component of their revenue as they scale across us and other channel partners. It's certainly a valuable economic opportunity for the partner, and for the financial institutions, obviously, that story we told upfront in the call certainly talks to what we're starting to see in terms of the economic and strategic value to them. Our revenue share, I mentioned already. So yes, we're excited about it. It's continuing to grow and offers strategic impact and economic value for all three of those constituents.

Operator, Operator

And the next question comes from the line of Adam Hotchkiss.

Adam Hotchkiss, Analyst

Great. Matt, I'd be curious how you think about the breadth of the platform as it stands today. There's clearly an expansion opportunity within the existing base that you mentioned in Q2 Innovation Studio, obviously, adds to that. But now that you're generating much more meaningful cash flow, are there any obvious areas customers are asking for that you look to invest in more deeply either organically or inorganically?

Matthew Flake, CEO

We're still in the early stages of our digital transformation, which involves digitizing any human interaction with our financial institution. We're exploring how to incorporate data and AI into this process. User experience is crucial for us, followed by commercial functionality and dynamic personalization. Fraud levels have surged, and one regional bank CEO has mentioned accounting for $30 million in check fraud each quarter for the foreseeable future. Our product has become one of our top cross-sells for fraud solutions. I'll have Kurt provide some insights on our AI initiatives. Additionally, we have Innovation Studio, which includes 160 partners we can collaborate with to address problems without needing to invest in numerous smaller solutions. This approach allows us to solve customer issues and share in the revenue. Innovation Studio has scaled significantly, with all deals in the quarter associated with it, and we've seen notable growth in Innovation Studio bookings in the first quarter. We'll keep investing in user experience, commercial banking, and fraud solutions. Kirk can share more about our AI strategy, as it's a major focus for us.

Kirk Coleman, President

Yes, I'll do it quickly. We're really excited about the future and what it's going to bring to us and our customers. We really think about it in three big buckets: there's internal use of it, how we become more efficient for our own good; how do we embed it in our existing products; and then obviously, what are some of the new products that we might be developing. There's an important fourth bucket, though, that Jonathan alluded to earlier, which is Innovation Studio, where we have all these fintech partners that are also going to be building AI solutions into their offerings. Already, we see that in four categories: digital customer support, fraud, marketing and targeting, and insights and financial wellness. It's already not just in the pipeline but in the solutions that we offer through Innovation Studio. When you step back a little bit and think about all the digital banking data we have and the millions of customers and users that log on every single day, over $5 billion a year. We also have in our relation pricing the largest, what we think is the largest loan commercial book in the world, a data set in the world and the largest commercial deposit data set in the world. That’s highly structured data already because of the way that it's used by our customers every day. We think that all leads to a lot of crossover in terms of solutions that we already have in market and what we could do there, but also in terms of some of the products that we'll deliver in the future.

Adam Hotchkiss, Analyst

Okay. Great. That's really useful. And then David, I appreciate the commentary on RPO and some of the lumpiness that can happen there quarter-to-quarter. Could you just remind us what the rest of '24 looks like from a renewal cadence perspective, maybe versus the same period last year? Just trying to get a better sense for how we should think about the RPO comps as we head through the year based on your visibility into renewals?

David Mehok, CFO

Yes, sure, Adam. This year is not going to be different than most years past where we're going to see most of our renewals come into scope in Q4. That's going to give us the biggest opportunity for renewals. We did see good renewal strength in Q1 and as we sort of look through the year, the one quarter that is relatively pressured from a renewal standpoint is Q3. So we have good renewals in scope for the remainder of the year, with Q3 being the most pressured and Q4 being the quarter with the most opportunity.

Operator, Operator

Your next question comes from the line of Matt VanVliet.

Matthew VanVliet, Analyst

Sure. But on the 90 banks that are using either commercial or retail but not the other. Do you have much of a sense of what the mix is that are using something somewhat modern that's not just kind of off-the-shelf from the core that might be a little bit more difficult for competitive displacement or otherwise, maybe what's the opportunity of something that's not modern and should be an easier win?

Matthew Flake, CEO

I don't have that off the top of my head. I will tell you that what they certainly don't have is a single platform that I talked about earlier, which is they're running a separate system that requires separate upgrades, separate back-office administration, a separate set of interfaces, and a separate user experience. When they move to us, they unify that experience both for the customer and the bank employee and the provider, which is us in this case, enabling us to upgrade the software faster and give them cleaner data. The quality of the system, obviously, with our win rates and the deals we're doing, I would argue we have the premier solution in the marketplace. Whatever we're competing against is not going to have that. It's more about the inertia to get them to navigate the conversion process and can we prioritize that. As we've talked about with the focus right now, it's about acquiring, retaining, and growing deposits and driving efficiencies to the business. Our system is clearly coming up as a priority for these financial institutions to convert to, and that's why you're seeing the demand environment that we've seen over the last couple of quarters and in the first quarter.

Matthew VanVliet, Analyst

All right. Very helpful. And then, David, when you look at the growth outlook in the pipeline over the next couple of years? It seems pretty robust, and you're talking about a pretty big backlog of ARR not yet live. Where do you stand in terms of headcount investments, whether it's around the implementation teams or the go-to-market team? How are we at in terms of the team that's on the field now ready to capture all the opportunity versus needing to add headcount and then sort of wrapped in that, any change in philosophy around using outside partners for some of the blocking and tackling type situations on the implementations?

David Mehok, CFO

Matt, yes. First and foremost, I think we still feel strongly about our ability to scale our costs relative to driver revenue growth. So we'll stop on that. Having said that, on the implementation, that's certainly one that we are going to continue to invest in headcount there while investing in efficiencies. We're doing things more efficiently with our customers. We're utilizing our global resources more effectively to lower the overall cost of an average implementation, but we still have to add resources given all the momentum we've seen on the booking side of things. Sales and marketing, we've gotten a lot more efficient there as well. I talked in the prepared remarks about our ability from a tax standpoint to continue to get much more efficient, and we think we have more opportunities for efficiency. That doesn't mean we don't have to add some resources as we continue to grow the number of accounts we're supporting. Matt talked a lot about the expansion opportunity in the call earlier. We need to have resources that can reach out and work with those customers to identify those opportunities and ultimately book them. We're constantly looking at ways to get more efficient. Partner utilization could be one of those. It's not something that we're committed to as of yet, but that's certainly one of the efficiency drivers that we're exploring going forward to improve the cost structure relative to the revenue that we're driving from a delivery standpoint.

Operator, Operator

Your next question comes from the line of Andrew Schmidt.

Andrew Schmidt, Analyst

Good results here. I apologize for joining a bit late. Sorry if this has already been addressed. Could you elaborate on what's contributing to the resurgence in Tier 2? It's great to see. Clearly, there are likely factors related to platform development and environmental factors. However, could you provide some insights into what's happening at that size of financial institution? That would be helpful.

Matthew Flake, CEO

Yes, Andrew. I think to some extent, we had solid Tier 2, Tier 3 performance last year. It was maybe a little overshadowed by some of the larger Tier 1s we got. We had a solid quarter-over-quarter with the Tier 2s and Tier 3 last year. But the performance is, I would say, is a lot of these financial institutions is just the time where they are on the pipe and coming up. We've been building the momentum we have with them. They have the same challenges that the larger banks do. It's just a matter of our solution for them; it's a little bit bigger of a decision, as I was talking about earlier, the larger ones to do retail, or commercial or small business these guys usually take into our platform. The conversion for them is converting retail customers, small business customers, and commercial customers. It takes a little more time for them to get organized, make that decision. But we signed more Tier 2s and Tier 3s this quarter than we signed in any quarter last year. What they're beginning to realize is not only do they have the advantage of being local, but their rates are going to be just as competitive as the big four, and they're able to walk out there and use our technology as a way to compete with Bank of America, Wells Fargo, Citi and others. We're hearing stories about wins, taking large accounts from them, whether it's municipalities, health systems, larger companies. They're going out and picking up this business because they have those advantages being local, being there to solve the problem for them and also being competitive on rates. That's what's driving the demand environment. It's about acquiring, retaining, and growing deposits. We've been in this business for 20 years in August and have a great reputation in taking care of our customers, building great products, and being there for them.

Andrew Schmidt, Analyst

Got it. Well said. I think the commercial platform is certainly a differentiator. If you could just touch on the pipeline for a second. I think a quarter ago, it seems like the pipeline was a little bit more balanced from a size perspective versus last year. To some extent, I think we see that coming through here. But maybe you could talk about the composition. Is that still the case? And if it is the case from an evenly balanced perspective, that would imply more visibility in terms of timing of deal closes and bookings and things like that versus maybe the larger wins that can be longer and have more uncertainty?

Matthew Flake, CEO

Yes. I would say it was probably out of balance last year with the size of the deals we did in the back half of the year, Andrew. I mean, it was steady Eddie in that Tier 2, 3. In this quarter, like I don't want to go off overboard; we signed 4 Tier 1s in the quarter. It was still a great quarter, but the Tier 2, Tier 3 make up. Remember, a $4 billion bank comp is not that different than an $8 billion bank from an economic perspective. I think David can comment on whether we're going to see some of these go live faster. But like I said earlier, a bank that does retail, small business, and corporate conversion that's a $4 billion, $4.5 billion bank could end up being a 9- or 12-month go-live. You're going to see with the expansion some of the stuff coming to revenue. We're happy with the results so far. I don't want to get ahead of us in the guidance. David looks at me funny when I do that. We have a lot of opportunity in the pipe as well as in that Tier 2 and Tier 3 space to win deals and get them wide a little faster than the largest deal in the history of the company that we signed last quarter, the big four bank for precision lender that we signed last year. It should come to revenue faster. But Dave, do you want to comment on that at all?

David Mehok, CFO

Yes. Look, there's maybe 1 or 2 months for some of these deals that we'll see at the end of this year in terms of revenue recognition. But for the most part, the majority of this revenue is going to start coming through starting next year. As I said, I don't know if you were on yet, Andrew, I know you said you joined a little bit late, but we did talk a little bit earlier about sort of the shape of the bookings, and how we see some of that manifest to revenue, particularly on the cross side. Some of the cross bookings or expansion bookings that we have will see some revenue later in the year for those. We were expecting some of that coming into the year, and we have some immediate time to revenue like license expansion, where we saw a lot of strength during the course of the quarter.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.