Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings First Quarter and 2020 Financial Results Conference Call. [Operator instructions] I will now turn the call over to Steve Calk, Director of Investor Relations. Sir, please begin.

Thank you, operator. Good morning, everyone, and thank you for joining us for our first-quarter 2020 conference call. With me is Matt Flake, our CEO; and Jennifer Harris, our CFO. This call contains forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of Q2 Holdings.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, including our most recent annual report on Form 10-K and subsequent filings and the press release distributed yesterday afternoon regarding the financial results we will discuss today. Forward-looking statements that we make on this call are based on assumptions only as of the date discussed. Investors should not assume that these statements will remain operative at a later time, and we undertake no obligation to update any such forward-looking statements discussed in this call.Also, unless otherwise stated, all financial measures discussed on this call will be on a non-GAAP basis. A discussion of why we use non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which may be found on the investor relations section of our website and in our Form 8-K filed with the SEC yesterday afternoon. Let me now turn the call over to Matt.

Thanks, Steve, and thanks to everyone for joining the call today. Obviously, we are in unprecedented times. The rapid spread of the coronavirus has forced all of us to change how we work, live and bank. So on today's call, I will provide a brief update on our first-quarter performance, but I'll spend the majority of my prepared remarks discussing the impacts of the COVID-19 pandemic on our employees and our customers and how we are responding.Before I begin, I'd just like to say that I'm incredibly proud and encouraged by how our employees have responded to this crisis. It's in trying times like these that we rally around our mission, and I'm inspired by the work our teams have been doing to expand and ensure availability of critical digital banking systems while working almost entirely remotely. I would also like to thank all the first responders and healthcare professionals who everyday put themselves in harm's way to protect and care for those afflicted with the virus. With that, let me briefly go through our first-quarter performance.In spite of the current macro environment, the first quarter was very positive for the business. Our strong start to the year carried us through the final 30 days of the quarter, by which time, shelter in place had become the norm and a vast majority of employees across the globe began to work from home. We generated non-GAAP revenue of $93.8 million in the quarter, up 32% year over year. We also added approximately 800,000 users in the first quarter, bringing us to 15.4 million total registered users, an 18% increase year over year.User growth during the quarter is made more impressive by the fact that our employees spent a third of the quarter working remotely, and nearly half of our new customers…

Thanks, Matt. I will begin by reiterating some of the points Matt alluded to on the durability of our financial model, then I'll review our results for the first quarter of 2020 and conclude with updated guidance for the second quarter and full-year 2020. We while COVID-19 has caused some disruption to sales processes and implementation projects. The impact to revenue in 2020 will be different across our lines of business, with Cloud Lending and PrecisionLender being impacted to a larger degree due to their international operations where COVID-19 hit first.Additionally, our cloud-based lending solutions typically convert to revenue quicker than bookings of our digital banking solutions. So the financial impact of a booking slowdown in this space will be more immediate. This is especially true for PrecisionLender, which is heavily focused on large enterprise deals and has a robust pipeline in Europe. In this region, we have observed the distracted buying environment and delayed implementations as these large enterprise customers focus existing resources on adapting to the new macro environment.We were in active contract negotiations with several enterprise customers, and these conversations were suspended given the widespread uncertainty and distraction of COVID-19. We believe these deals are not lost, but rather just delayed until these enterprises begin to regain some certainty as to the outcome of this pandemic and begin to refocus their internal business resources on new project implementations. In March, we also began to see a slowdown in decision-making by certain prospects related to net new digital banking deals, and we expect this slowdown to continue until they have adjusted to the current environment. However, given the extended time to revenue for our net new digital banking customers, the impact of this slowdown will materialize more slowly.We also don't know the extent to which any slowdown will…

Thanks, Jennifer. Before I hand the call over to the operator, I'd like to reiterate a few key points. First, we have adapted and taken action in response to the current environment. We're providing updated guidance for the second quarter and full-year 2020 to reflect the slowdowns we are seeing in customer decision-making as they deal with the distractions of this situation.We expect the biggest impact of these slowdowns to come in the second quarter, but given the global uncertainty on when things will return to normal, we've aimed to be conservative in the guidance. Second, I want to reiterate that the health and safety of our employees has been paramount in our planning. We have been seamlessly working remotely since early March and feel we are well positioned to continue operating this business in this environment for as long as the situation requires. Third, we believe we have a healthy and progressive customer base.These are financial institutions that have bought into digital transformation. And in spite of some key challenges, I've been impressed with their ingenuity during this sudden transition to digital. While many of them have shifted their focus to providing immediate support to their communities, we are still engaging in frequent conversations with them, and I believe they are developing an even greater appreciation for our solutions and our partnership. In times like these, we are fortunate to have a strong financial foundation. I believe our subscription model, long-term contracts and strong balance sheet equip us to endure the immediate situation and emerge in a great position to partner more deeply with new and existing customers.Finally, when we do emerge from this crisis, I expect the demand for digital transformation to be stronger than ever. When that time comes, I believe our unique product portfolio, our financial model and our track record of execution put us in a tremendous position to capitalize on the next wave of digital innovation and financial services.Thanks. And with that, I'll turn the call over to the operator for questions.

[Operator instructions] Our first question comes from the line of Bob Napoli from William Blair. Your line is open.

I guess glad to hear you're all well. And just on the investments, Matt, what are you seeing that surprised you in this? And how have you adjusted? What are the key investment products that you're working on? If you adjusted your investment strategy at all because of COVID?

Yes. Thanks, Bob. I think I appreciate the well wishes. I hope you're well, also. I think that one of the things that we did almost immediately, I think we were one of the first to go to a remote environment on March 3rd. We changed our mindset to adapt to the world that we're in today. And you look at that, whether it's digital banking, our onboarding product. We grow.We invested quickly into that to make sure we had capacity and scale. We improved the delivery process and timing on that so we can onboard customers faster. We talked about the infrastructure investment that we had to make on the hosting environment for the demand that came through the stimulus packages. We also began to roll out products like mobile remote deposit capture, skip a payment, as we mentioned in the call.And then we did -- we had real heroics on the Cloud Lending side of the business and PrecisionLender side of the business, preparing for the SBA, PPP program to put products in place to help our customers facilitate the distribution of those funds. And so from that standpoint, we pivoted on a dime to begin to focus on the world that we're in today. I'm really proud of the work that we've done, and we're going to continue to operate in this environment as a real-time basis, paying attention to demand and customer request to be able to solve problems so that these customers can do things digitally.

Thank you, appreciate it.

And our next question comes from the line of Joe Vruwink from Baird. Your line is open.

Great, good morning Matt, good morning Jennifer. I hope you're both doing well. I appreciate it's a pretty dynamic environment. So all the details on the guidance update are helpful. I guess, longer term, when you think about what you've communicated in the past and a structural, call it, organic growth profile of 20% or better. If you had to reset that thinking today, how would you kind of think about it? And some of the observations, just even in March, I think your online account base added 3 or 4% to growth within just one month. So when you look at those trends, or you think about just engagement on digital lending and the amount of lead generation that's happening right now, I mean, could it ultimately be a lot higher or somewhat higher than 20%, but just the timing to get there is a bit unknown right now?

Yes. I think you've hit some of that on the head there with your last comment, right? The timing is unknown. We do expect that if you listen to the comments in our guidance, even with the expected 2% reduction from previous on the digital banking side, that still insinuates at the top end of the guide, about a 20% year-over-year increase even with the pressures that we're facing right now. How quickly that comes back to be closer to the 25% of the 20 to 25% range that we mentioned before really depends on how quickly the business starts to return and how much of this new opportunity we're able to capitalize on.But I would also remind you, as we mentioned in the script that some of the PPP lending products, etc., that we've done are really structured to be one-year contract, so that will be a bit of a negative in our 2021 compares as those roll off if we can't convert those to more of the traditional lending platform that Cloud Lending or PrecisionLender offers. So that plays a little bit into the timing as well. But I certainly believe that when the market returns, we will get back to that 20% to 25%, and how far north it can go really depends on just the level of user activity, the level of engagement. And the one thing I would point out is, yes, we had a large increase in the number of registered users during Q1, but don't get overexcited about that being from COVID.While we did see a small increase from March to April, it's still too early to see what that longer trend is going to be. A lot of the increase that you saw in Q1. If you remember, we took several customers, large customers live right at the end of 2019, as well as we pushed a couple of customers into 2020. And so it's not uncommon to see those kinds of large spikes the quarter after folks go live as they begin to roll those phases on.And then the ones that pushed from Q4 last year also hit in Q1 of this year.

Great, thank you very much.

Thanks Joe.

Our next question comes from the line of Tom Roderick from Stifel. Your line is open.

Hey Matt, hi Jennifer. Great to great to hear from you this morning. Thank you for all the details with respect to the various business lines and the various segments. Really, really helpful.I know there's a lot of moving parts. Matt, you made some interesting comments, particularly around sort of the PPP stuff, but you talk about a sudden shift to digital. So I guess, there's sort of two questions underneath the thought on that, which – No.1, big picture. As you think about some of these small and regional banks, Tier 2, Tier 3, really embracing this digital concept.Could we be thinking about longer-term down the road that online banking and digital onboarding that these become sort of the core systems of record in a way that they haven't been over the last 20 years? And there's a bigger picture question around like how banks see their customers and how they embrace their it? And then sort of a second more pointed question on PPP. I would love to hear just a little bit more detail, again, about how you're structuring these annual contracts. Sounds like a lot of these are sort of net new customers, perhaps, some good lead gen there. But are they transactionally tied? Just love a little bit more detail around the new digital lending solution for PPP.

Yes. Thanks, Tom. So yes, on the macro environment, whether it's Tier 2, Tier 3, I'll think about a share a conversation I had with the CEO of a Tier 1 financial institution about two weeks ago, which was essentially, he just said pre-COVID, he thought he had three years to make these changes in existing digital solutions. After COVID, he thinks he's got 12 to 24 months.If you look at the activity, one of the things that's been interesting that we've tracked over the last 60 days, there's been more CEO engagement in deals, especially in the Tier 2, Tier 3 space. And so all of these things are driving the understanding that when you have to close a branch and you got to walk out to a curb, to have somebody fill out their loan paperwork. No matter what it is, they're beginning to realize that these legacy systems weren't designed for digital experiences. And so this is what we've been doing for more than 20 years and 16 years here.It all lends itself to significant upside once we get to whatever the new normal is going to be. As far as the system of record, we've always made the case that the general ledger, the account system and the lending systems are repositories for data, but you get a much bigger picture of an account holder through a digital banking system. You have their accounts, you have their loans, but you also have their behaviors, their devices, what they do, where they go, and that type of data, which gives you a much bigger picture of who somebody is. And then we begin to use data analytics to understand the behaviors or whether it's cash flow, who they pay, when they pay or whether it's potential opportunities…

And our next question comes from the line of Brian Peterson from Raymond James. Your line is open.

Maybe a less deal question here, but I wanted to understand with the virtual services or the remote services deployments, it sounds like those have trended really well. I know that services has been a little bit of a drag on gross margin. Does this give you the opportunity to potentially rethink how you're delivering some of those services going forward? And I don't know, maybe we could think about that being a margin uplift versus what we saw pre-COVID?

Yes. I would say that we have always been able to deliver, support, maintain, build our products remotely. The thing that has been somewhat interesting as we go through this process is we probably had two to three trips that would be either the client coming here or us going to see the client. And I think we're beginning to realize that whether it's a Zoom meeting or just doing things remotely, that we may not have to make as many of those trips.We're also beginning to see opportunities in process where we can make it more efficient to deliver the software. And we're creating new habits that I think could be lasting and could help on the gross margin side of the business. The delivery slowdown or the delays, if you think about -- if you're running a bank or a credit union right now, they had to stop everything they were doing, begin to work remotely, which is something that they are not comfortable with. On top of that, they had to continue to run the bank, and then they had to distribute more close to $1 trillion of funding through this program that's been rolled out.So those distractions, coupled with their customers have their own distractions as well. These are the small businesses around the country that we've all heard so much about that are trying to get through this. So I think we're going to get to some normalcy here, and we'll get back to it. We're just trying to make sure that investors and analysts and everybody understands that this -- it's going to take some adjusting to go through this process.We're fully comfortable delivering our software remotely. But our customers and their customers, it may take a little bit of time. So I do think you'll see some opportunities for us to improve margins on delivery, as well as get better as a company as we deliver these products remotely.

Good to hear. Thanks Matt.

And our next question comes from the line of Joseph Vafi. Your line is open.

Hi guys, good morning. Just a quick one on interest rate environment and how you see that affecting the lending business. And then obviously, kind of PPP aside, just get a feel for volume-based revenue in the lending business if the economy stays pretty soft here for a little while?

Yes. Let me just share some data with you that we were able to get out of our PrecisionLender product, which has processed more than $2 trillion or looked at more than $2 trillion of loans in 2019. The week of 4/17 -- of April 17th, we saw 3.75 times the loan count volume in the S&P space increase. Absent PPP, we saw a 70% decline in loan count volume, and 90% decline in loan dollar volume.Basically, what that tells you is that everything, all the lending that was going on, the vast majority of the lending was the PPP program. This is going to continue to work through the system for the next -- I can't prognosticate it on that -- for some period of time. And then we think you'll start to see lending resume to whatever the new normal will be. Obviously, interest rates are as low as they can be right now.But we believe that our solutions, whether it's the sales and negotiating tool with helping people with pricing in this very uncertain environment, the data we can use to help them with that, or is it -- or the digital onboarding aspects of Cloud Lending from the borrower's perspective, all the way through the processing and servicing of the loan are going to be real opportunities for us. So I don't really want to prognosticate on when the lending market is going to come back or what's going to happen there. But I believe our -- the tools we have are going to be extremely helpful, and they're going to be in high demand when the dust settles here.

Thanks.

And our next question comes from the line of Sterling Auty from J.P. Morgan. Your line is open.

Yeah, thanks. Hi guys. So, on the 800,000 increase in digital users, what portion of that came from recent go-lives versus perhaps an increase in users from long-standing customers. And just wondering maybe what's left to penetrate in those existing customers and how the growth in users actually impacts your revenue.

Yes, Sterling. So the 800,000 users, I would say, was primarily focused this quarter on new users going live this quarter, plus what I had mentioned earlier in the call about the increase in users from those users who came on in Q4 because several of them rolled their users on in waves. So even though they were live in Q4, they contributed quite a bit of growth to Q1 as well. We did see some organic growth, but it was in line with what our historical organic growth rates have been, which, on an annual basis range from 9 to 11%.And it's hard right now to tell how quickly that's going to increase or if it's going to increase because of the user engagement, we've definitely seen user engagement increase. But I think a lot of that is just engagement increasing within users that are already on our system, checking for their stimulus packages, etc. I do think there will be some new, but we need a couple of months to try to get a couple of trends developed before we can report more holistically on that. The other thing I would say is, remember that our contracts have committed minimums.And so not every user adds to revenue. Some users add to the customer reaching their committed minimum and future revenue as they continue to add in the future, but not necessarily day one from adding that user. And then the other thing that's still offsetting that is trying to figure out exactly how many users push with some of these project delays that we're currently seeing. So there's a lot of ins and outs, and I think we just need more than one month to be able to determine a trend there.

Understood. Thank you.

Thanks Sterling.

Thanks Sterling. Hope you're well.

And our next question comes from the line of Peter Heckmann from Davidson. Your line is open.

Hey, good morning everyone. I hate to ask you to repeat yourself, but I went through the numbers very, very quickly. Could you just go through those backlog numbers and try and help us characterize the year-over-year bookings growth?

Yes. So the backlog increased about $48 million quarter overquarter, and that was about a 4% increase sequentially. It was a 30% increase over the March 31st, 2019 balance. Of that 30% increase, roughly 2.5% of that came from the addition of PrecisionLender in Q4 of last year.And then of the bookings that we saw on the digital banking side, as Matt mentioned in his prepared remarks, cross-sales and customer contract extensions accounted for a large portion of that. And just for some frame of reference, the contract extensions related to renewals and cross-sells was about three times more in Q1 of 2020 than what it was in Q1 of 2019.

Got it. Got it. And if I just could just get the -- what amount of revenue the PrecisionLender generate in the first quarter?

On a GAAP basis -- or on a non-GAAP basis, it was roughly 4%.

Thank you.

Thanks Pete.

And our next question comes from the line of Josh Beck from KeyBanc. Your line is open.

Thanks Matt and Jennifer for squeezing me in. Glad to hear everyone is doing well. I just wanted to ask, when you think about the adoption curve on the corporate side, my view is that it was always lag in retail. And with this new resurgence in PPP and banks effectively reinventing some of their corporate and commercial projects. Could you see that curve look a lot different as we go out the next couple of years? And then, Jennifer, I don't know if you can comment, but anything you can share on how you're thinking about net revenue retention this year and beyond?

Yes. Our -- I mean our corporate banking solution has been, obviously, a very strong product for us. We continue to innovate on it. And if you think about tying in some of the PPP stuff, the on-boarding of commercial customers, treasury on-boarding of customers, on the lending side of the business and then also on the commercial and then tying PrecisionLender into this, our corporate banking opportunity is as big as it's ever been, and our products just continue to get better and better. We've signed some big customers that are really pushing us on the innovation side that I think is going to be very helpful for a lot of the other banks that can use the technology. So yes, it has been lagging. The reason it lags retail is because those are the crown jewels of a lot of these banks, the crown jewels of their business. And so moving them has always been a very careful process for them.But I think the demand for digital user experience, mobile phones and tablets, which we do better than anybody on the corporate banking side is going to be -- it's highly differentiated and it's going to continue to be a differentiator for us in the marketplace. I'm very bullish on our corporate product and what the team has done with that, as well as how we partner with our customers to really change the way people use technology on the corporate side.

Jen? Yes. And on the trailing 12-month revenue retention, for this year, I would expect us to see very similar numbers to what we posted the last couple of years, somewhere between 115% and 120%. And I think going forward, as we come out of this crisis and see -- and are able to capitalize on the opportunity that we think there's going to be for the new revitalization of the digital transformation, I think you could see that increase, especially as we begin to cross-sell PrecisionLender products into our existing customer base as well.

And our next question comes from the line of Andrew Schmidt from Citi. Your line is open.

A question on just the pipeline. In this environment, curious to get your thoughts on decision-making by FIs. Given the amount of uncertainty and clearly a lot of distraction, do you see a lot of instances in these clients just defaulting to an incumbent provider, I mean, perhaps missing out on this -- the RFP altogether? Just curious to get your thoughts around just decision-making processes as it pertains to the FIs in this environment?

Yes. I mean what I would say is that we are monitoring activity, whether it's the weekly number of demos we do, the number of RFPs we get, the amount of inbound interest. I have a weekly call with the sales org, as well as the relationship management organization to get a feel for what's going on. And the activity is similar, if not a little better than what we saw a year ago at this time in both March and April.But just the ability for the organization to come to a decision, we just believe it's going to take a little bit more time. As I said, there's more executive-level engagement in these opportunities. And there's just a little bit of a delay. Now on the enterprise side of the business, which is separate than the Tier 1, Tier 2, Tier 3, we had several deals in Europe and multiple deals in the United States that were enterprise deals with PrecisionLender that literally they just pushed away from the table as we were negotiating contracts and said, we're going to have to come back to this after we get through this crisis.So that was disappointing, but those deals are going to come back to us. We're staying in touch with them as soon as things recover. So the pipeline, it continues to get -- it continues to grow. It's more a matter of -- I just don't know how these people are going to come to a decision in some of the environments they're operating in, with some of the distractions not like for them but, their customers.But engagement numbers are still where they need to be. It's just a matter of -- I just can't help but think there's going to be some slowdown in these decisions that are happening, especially in the second quarter. And hopefully, we return to some normalcy soon -- as soon as possible.

Got it. That's helpful context. If I could sneak one more in for Jennifer. Jennifer, you mentioned the 2% reduction in digital banking revenues assumed for this year. I think you alluded to a higher level of cross-sells as a potential offset. Could you speak to, I guess, what level of offset you're assuming in the outlook from cross sells in the digital banking channel?

I think it's hard to tell because that's predicating us knowing what's going to close in the future. But I think what we've done is tried to balance the amount of risk that we see in project slips with the amount of inbound interest from our existing customers that we're seeing for new products such as mobile remote deposit capture, skip a payment, etc., that Matt mentioned earlier. So there's a lot of ins and outs on that. But I think on average, they ought to be able to offset to only amount to approximately a 2% reduction in the overall digital banking business.

Thank you both very much.

Our next question comes from the line of Terry Tillman from SunTrust. Your line is open.

Hey Matt and Jennifer. Glad you're well and thanks for putting me in. And this is probably a tough question for you, Matt, but if it follows up on one of the prior questions. When you kind of segment this with enterprise deals and then these Tier 1 deals, which are kind of bread and better deals for you guys.I know you think 2Q is going to be tough, but like is it too early to tell some of these deals pushed to the next fiscal year? And the reason why I asked that, it seems like maybe easier said than done, but like, look, you guys are in an efficiency play, too. So part of this could be really about helping them with the bottom line on some of the back-end processing for things like loans and things of that nature. So I'm just kind of curious, if there's some way you can kind of change the conversation a little bit to kind of get them off of a no-go decision.

Yes. Thanks, Terry. Absolutely, that's the play. Right now, though, if you think about it, the focus is on understanding their loan book, their risk, their exposure to distributing trillions of dollars worth of funds.And that's globally right now. Europe -- the U.K. and Europe are rolling out their own stimulus packages. So I think on the enterprise deals, I'm hopeful that late third, Q4, they'll come back around.But we didn't build this plan on my hope. We built the plan on what we're seeing today. And so that's really what we're focused on. But I agree completely with the disjointed pricing that's occurring and all these other things, PrecisionLender is going to be extremely valuable in these conversations.But they've come up with things like the market analysis product to go help our customers understand the data, like the data I shared earlier around what you're seeing on the SMB side, and we're seeing a lot of interest in that product. So we are just trying to make sure that we're being cautious. If you think about 2016, we did the same thing. We were out in front of it, and we're just trying to make sure that we're being cautious with this.But in the August call, we'll give you the same transparency and the update that we have. But we're driving that same message to these customers. It is critical that you have as much data as possible in these uncertain times, and you have tools that can help you maybe not price things based on your gut, but on data. And I think it's really resonating with a lot of the prospects we're talking with.They just have to get through this distraction, running the bank remotely, getting their systems to work. And some of the legacy systems are some of the problems for the distractions. But I think when they come out of it, they're going to say, we have to make a change in case another pandemic or this comes back or whatever. So it's certainly an opportunity. Thanks, Terry.

Thank you.

We have time for one more question, I think.

Our final question today will come from the line of James Faucette from Morgan Stanley. Your line is open.

Good morning, this is Jonathan on for James. Thanks for squeezing me in. I'll look on my thanks for the detailed contrary across segments. My question is on users, and you touched on this briefly, but I was hoping for some clarification.Can you provide any color as to whether any digital bank customers saw overages in the number of users accessing digital banking? If so, can you quantify impact on revenue?

Yes. So we saw overages. We see overages every month, even before we had the COVID impact, it's hard to quantify because we didn't see anything specific from February to March. And obviously, we have to wait until the end of the month to get the usage data.So we just got the April usage data on May 1st and are digging through and trying to quantify that. But as I mentioned earlier, we haven't noticed anything that would indicate a larger spike than normal, things still seem to be in line with the 9 to 11% annual growth that we've seen historically.

And I would just add on top of that that I want to be clear that the increased volume that we saw in the system when the stimulus checks came out, was the there was a 75 million tranche and then 50 million tranche and then a 30 million tranche that came out, was the actual existing users of our customers logging on to see if that check had hit. They set, or the ACH had hit. And so that's where the volume came from. This spike was not a bunch of new users coming on the system.I just wanted to clarify that that people were logging in at unbelievable levels, 1 million an hour to see whether their stimulus check hit, which is obviously important to them as that money was hitting their bank accounts. So just a point of clarification there. Thanks. And thank you, everybody.I apologize for some of the order on the call. We had a little bit of trouble on with the system we were using here to get you order in. So apologies. I appreciate everybody's time today.Thanks, everybody. I hope everybody stays safe and healthy. And I hope everybody has a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.