Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Q2 Holdings Inc (QTWO, Financial) exceeded the high end of their guidance with non-GAAP revenue of $172.9 million, up 12% year over year.
- Subscription revenue grew by 17% year over year, indicating strong demand for their services.
- The company delivered free cash flow of $28.8 million, a significant increase from the previous year.
- Q2 Holdings Inc (QTWO) secured six Tier 1 deals, including an enterprise win, showcasing their competitive edge.
- The annual customer conference, CONNECT, was highly successful, with positive feedback on strategic product roadmaps and innovation priorities.
Negative Points
- Professional services revenue continues to decline, impacting overall revenue growth.
- The company faces headwinds in the services segment, with a continued decline expected for the foreseeable future.
- There is uncertainty around the impact of potential M&A activity on future growth.
- The seasonality of the Helix business and professional services revenue decline are expected to impact Q3 results.
- The company is cautious about the adoption of AI and generative AI due to the risk-averse nature of financial institutions.
Q & A Highlights
Q: David, starting with you, just in terms of your comments about the 15% early look at 2025 subscription growth. We've now had three straight quarters of really nice subscription ARR growth that's been at that level. I appreciate just still more a couple of more quarters this year to go. But can you just frame some of the puts and takes of why you kind of shift that 15% for next year as things stand today? Thanks.
A: Yeah. Sure, Alex. And first, let me level set on the ARR. Yeah, three straight quarters of it. If you look at the last five quarters and aggregate that, we're averaging about 17% that's the subscription growth rate you saw this quarter in Q2. We do sort of see a barbell approach to this. We're seeing some of the subscription strength in ARR manifest itself right now based upon the quick time to revenue around the expansion opportunities. And the other side of that barbell is we had a lot of large deals in Q4 of last year and Q1 of this year. Those deals have a longer time to implementation. So they're not going to be going live until mid next year. And when you think about the impact that that has on our subscription growth rate, you don't get a full year of that until 2026. So we're certainly seeing the benefit of some of that ARR growth, the subs ARR growth that you referenced. Today, we're going to see some of that as well. Next year, but it really starts to stack up, and you're going to see the benefit of that as we exit next year. So hopefully, that helps bridge the gap between what you're seeing from an ARR standpoint on subs versus what we're seeing right now, and then what we gave rough guidance for for next year.
Q: Just in terms of gross margin, and I know you don't always the subscription gross margin, but you called out really good expansion activity. You called out really good renewals as a positive over the last few quarters here. I know there's been a lot of work behind the scenes on the underlying infrastructure side. Can you just help frame where you think subscription gross margins are today or could get to over the medium term relative to what you report on the blended number? Thanks.
A: Yes. And you know, we've talked about this before. I think the target that we put out there around getting to 60 points of gross margin over the few years, through 2026 being the last one that we talked about, is still well within our crosshairs, if you will. We're doing a lot of things in regards to the way that we operate both in terms of implementation, as well as in terms of support and that cost structure continues to improve. And we have plans in place to continue to drive efficiencies there over the coming years. And then the bigger driver of this, as you can imagine, is the subs that we just talked about. The mix up to subscription specifically is certainly benefiting the overall gross margin profile of the business. And to your question specifically on what subs has the opportunity to get to, we've talked about this before. But when we go through a renewal process, and that implementation revenue rolls off, we're typically around 70 points of gross margin. So that's a good indicator of where we are from a sub standpoint, right now, overall. But obviously, we blend in those professional services, you blend in the implementation services and some of the transactional. That does put an overall drag on the gross margin profile. But we feel good about the progress that we've made around efficiencies. We feel good about the progress we've made on pricing and the mix to subs. And feel like we're still on track for continuing to expand our gross margins going forward.
Q: Well, you have exposure to a range of FI sizes with some legacy providers mentioning a shifting focus towards smaller FIs. Have you seen an impact on win rates, the lower end recently? And there's also been a lot of competing digital banking products lately, wondering if this has an impact either?
A: This quarter, we had a lot of success in the Tier 2 and the Tier 3 win rates where they historically been, if not a little better, as you work your way up the line. But we don't really focus on the size of the bank as much as the approach and the attitude the bank has worked technology taking a long-term view. We want banks that want to be in this for a long time in credit unions as well, because they're the ones that are going to do the acquisitions, they're going to continue to grow. So we don't really favor a certain asset we more in favor of a management team or an ownership group that wants to use technology as a weapon and not of the shield. So no -- there's no change there. As far as other competitors, I haven't seen any newer competitors jump into the space that I know of. Every deal is a dogfight you get win it. But like I said, our win rates are where they've been historically, and we continue to do really well. So there will be new players coming in, and we'll be prepared for them. We still have a broad set of products and we solve a lot of problems with our single platform that a lot of other vendors can address.
Q: I know you've historically benefited from end market consolidation trends, typically landing on the acquiring side of transaction as you mentioned. Would you expect the pace of consolidation to return to historical norms following the election? And is there any impact to the longer-term targets in the case of continued slower trends?
A: That's hard to predict what's going to happen. Each administration will probably have a different view on acquisitions. So I'll probably just wait to see what happens with the election with that. But I think we're obviously doing really well, if you look at the numbers in the quarter and the win rates we're having. And so M&A would be -- if the historical trends kept up would be a tailwind for us if they picked up. So it's just hard to predict what's going to have on that. I'm not really to pontificate on who's going to win and what the results are going to be. So we'll know next quarter pretty soon around the earnings call.
Q: Pretty high profile failure in the SaaS space this quarter, along with some increased scrutiny and comments from the Fed around the overall industry. So I was wondering if you could just comment on those two things. First, does that failure create opportunity for Helix? And then secondly, any thoughts you might have on the recent Fed announcement around that?
A: Yeah. Thanks, Chuck. It's Jonathan. I'll take this, the both of these. When you think first about the vendor that you're mentioning, it certainly has created some noise in the space. I think we definitely see opportunity on the back of that. But what I'd say is we're going to be remaining very disciplined about the prospects that we look at and the opportunity set in front of us. Because as you look at some of the names of customers that have
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
