Q4 2023 Earnings Summary
- Record Bookings and Backlog Growth Indicate Strong Future Revenue: Q2 had a record total bookings performance in Q4, over 75% higher than their previous all-time high, and added a record $269 million in total backlog, indicating strong future revenue growth as these bookings convert to revenue. The company expects acceleration in subscription revenue growth in 2025 as they implement larger deals signed in 2023.
- Strong Competitive Position and Pricing Power: The company is able to drive the price they want, with Average Selling Prices (ASPs) up, reflecting their strong competitive positioning and customer recognition of the value of their platform. This pricing power, combined with high win rates and successful displacement of competitors, supports revenue growth and margins.
- Innovative Product Offerings Driving Customer Adoption and Retention: The Q2 Innovation Studio had a breakout year in 2023, cited as a key reason for choosing Q2 in more than 90% of net new digital banking deals, and approximately 80% of digital banking customers are participating in the Innovation Studio ecosystem. Customers have been able to offset more than 50% of the annual cost of their digital banking contract through revenue and cost savings from Innovation Studio solutions , enhancing customer value and retention.
- Declining transactional and services revenue: The company is experiencing continued pressure on its transactional and services revenue, with expectations of low single-digit declines year-over-year, which could negatively impact total revenue growth despite strong subscription growth.
- Delayed revenue recognition due to longer implementation timelines: Larger deals signed in recent quarters have longer implementation cycles, delaying the conversion of record bookings into revenue, and resulting in no material revenue acceleration in 2024, potentially impacting near-term revenue growth.
- Gross margin pressure from revenue mix: If there's better performance in the lower-margin transactional and services segments, the company expects pressure on gross margins, necessitating adjustments in spending to maintain margin targets, indicating potential challenges in sustaining profitability as the revenue mix shifts.
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Long-term Growth Visibility
Q: How sustainable is your growth momentum in deposits and pipeline?
A: Matthew Flake emphasized that he hasn't seen such a demand environment in a long time, with a tremendous commercial opportunity and a pipeline healthier than last year. He feels confident about future opportunities, noting that deposits are at the center of what customers and prospects are seeking. -
EBITDA Margin Expansion Guidance
Q: What drives your medium-term EBITDA margin expansion to 22%-24%?
A: David Mehok explained that EBITDA improvement over the next three years is expected to come 60% from OpEx scaling and 40% from gross margin expansion. They are focused on both aspects and see continued opportunities to expand margins beyond 2026. -
Capital Allocation Priorities
Q: How are you prioritizing capital allocation between debt repayment and other uses?
A: The company is focused on generating cash to retire debt due in 2025 and 2026 but is open to pivoting as the environment changes. Jonathan Price noted that M&A could become a focus once market valuations adjust and higher-quality assets become available, likely in the back half of 2024 and into 2025. -
Pricing Environment and Competition
Q: Are you experiencing any pricing power amid competition?
A: Matthew Flake stated that they can command the price they need, with average selling prices going up. Customers recognize the value of their platform and are willing to pay fair value. They avoid price wars and focus on providing a differentiated product. -
Cross-selling and Wallet Share Expansion
Q: How much more growth can you achieve with existing customers?
A: There is significant opportunity to cross-sell products like relationship pricing, commercial or retail solutions, and fraud products into their existing customer base. With 115 customers over $10 billion in assets, they see a tremendous amount of greenfield opportunity ahead. -
Product Investments and R&D Commitment
Q: Are you continuing to invest in product development despite debt repayments?
A: The company remains committed to investing in products, spending around 19% on R&D. They continue to innovate across user experience, commercial, fraud, and AI products, believing it's crucial for differentiation and long-term durability. Debt servicing does not impede their investment plans. -
Innovation Studio and AI Initiatives
Q: What is the impact of Innovation Studio and AI on your business?
A: Innovation Studio continues to differentiate them, included in all Tier 1 digital banking deals. While financial contribution is growing significantly, it's still from a small base. AI initiatives like Andi Copilot are in early stages but receiving good feedback, with plans to expand functionality. -
Renewal Activity and Pricing Uplift
Q: What did you see in terms of renewals and pricing in Q4?
A: The company saw renewals aligning with prior years, with opportunities to expand product sets and maintain or raise pricing compared to deals from years ago. This results in uplift and compounds over time, building subscription revenue for future years. -
Demand Sustainability and Potential Pull-forward
Q: Are you concerned about demand pull-forward and sustainability?
A: Matthew Flake believes that deposits will remain critical for the foreseeable future due to interest rates and money supply conditions. He doesn't see rates dropping quickly and plans to capitalize on current opportunities, aiming for long-term customer relationships. -
M&A Outlook and Past Acquisitions
Q: How have recent acquisitions performed, and what is your M&A outlook?
A: Recent acquisitions like Sensibill are being cross-sold and integrated into AI initiatives. The company expects future M&A opportunities when valuations adjust, focusing on high-quality assets. They see value in expanding into adjacent areas identified through Innovation Studio insights.