Q2 Holdings, Inc. Q3 2025 earnings call

Thank you, operator. Good afternoon everyone and thank you for joining us for our third quarter 2025 conference call. With me on the call today are Matt Flake, our CEO, Jonathan Price, our CFO, and Kirk Coleman, our President, who will join us for the Q&A portion of the call. This call contains forward-looking statements that are subject to significant risks and uncertainties, including, among other things, with respect to our expectations for the future operating and financial performance of Q2 Holdings and for services industry. Actual results may differ materially from those contemplated by these forward-looking statements and we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct.

Important factors that could cause actual results to differ materially from those reflected in the forward looking statements are included in our periodic reports filed with the SEC, copies of which may be found on the investor relations section of our website, including our quarterly report on Form 10-Q for the third quarter of 2025 and the press release distributed this afternoon and filed in our Form 8-K with the SEC 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, other than revenue, 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 is available on the Investor Relations section of our website and in our Form 8-K filed today with the SEC. We also have published additional materials related to today's results on our investor relations website. Let me now turn the call over to Matt.

Thanks, Josh. I'll start today's call by sharing our third quarter results and highlights from across the business. I'll then hand it over to Jonathan to walk through our financial performance and guidance. In the third quarter, we delivered strong financial results with revenue and Adjusted EBITDA both above our guidance. We generated revenue of $202 million representing 15% year-over-year growth and Adjusted EBITDA of $49 million or a 24.2% margin. We also generated free cash flow of $37 million in the quarter. In addition to the strong financial performance, we had the best third quarter in company history from a bookings perspective. As we shared earlier this year, we expected our larger deals to be weighted toward the second half and we saw that begin to take shape with seven total Tier 1 and Enterprise deals in the quarter.

This concentration, combined with a solid mix of new and expansion wins, drove the record third quarter bookings activity. Several of the Tier 1 and Enterprise wins were net new, showcasing continued momentum in acquiring new customers, and all three major product lines contributed to the quarter's performance. On the digital banking front, we saw continued success upmarket, including a net new win with a bank exceeding $80 billion in assets that will begin by using our platform for retail and small business. We also signed a major expansion with a $60 billion bank that started with Commercial and will now add Retail. As demonstrated by these wins, our single platform approach unifying retail, small business, and commercial continues to differentiate Q2, help us compete more broadly, and creates meaningful expansion opportunities over time.

During the quarter we also had two instances where a Q2 bank was acquired by a larger institution and in both cases the acquiring bank selected Q2's platform to serve the combined entity. This is an indicator of our competitiveness and the scalability of our technology, especially as bank M&A activity continues. Our fraud solutions continued to gain traction as well. We signed the largest fraud deal in company history during the quarter, a significant expansion with an existing $200 billion digital banking customer. This win was for our Check and ACH Fraud Solution which continues to see robust demand in the market. With the cost and complexity of fraud growing, customers are increasingly turning to Q2 as a strategic partner to help them manage risk more efficiently and effectively.

We also had our strongest relationship pricing quarter of the year, highlighted by multi-year renewals with two top 10 U.S. banks. Our Relationship pricing solutions continued to be an important lever for financial institutions seeking to optimize yield, profitability, and growth across both loans and deposits. Beyond our strong sales performance, we also recently hosted Dev Days 2025, our second annual conference for partners, customers, and employees who build on the Q2 platform using our APIs and SDK. While our annual client conference Connect is our venue to showcase production-ready innovation and customer adoption proof points, Dev Days is an event where we share architecture and technology enhancements and explore the next frontier of our platform.

At this year's event, AI was front and center and we showcased several ways we intend to bring leading AI capabilities to our platform for the benefits of bankers, account holders, developers and our fintech partners. We demonstrated a range of planned AI offerings that illustrate the breadth of our strategy. The first was an AI Co-Pilot that can help account holders and bank staff alike, enabling account holders to receive guidance and manage money through natural language prompts and customer service representatives to retrieve and summarize information. We demonstrated AI-assisted coding in our SDK which makes all of our developer documentation available via conversational developer tools and will help customers, partners and even Q2 go from idea to execution faster.

We shared a customer-facing extension of our internal AI assistant that indexes the vast archives of our internal Q2 knowledge and makes it available through an LLM, which we believe will help our customers self-serve and get faster customer support outcomes. Finally, we shared a new partner data integration strategy that is intended to enable us over time to turn our wealth of 1,000+ backend integrations and more than 200 FinTech partners into a unified data and capabilities ecosystem that will empower agentic innovation. The key takeaway from Dev Days was our customers need to invest in innovation, which requires mission-critical partners with expertise in handling highly regulated data and managing complex integrations to enable AI adoption.

We believe we are well positioned to be that partner of choice as we have a proven track record of innovation, can leverage our network of customers, partners and integrations to build new capabilities on our platform, strengthening it with every generation of innovation. Our platform and the ecosystem that surrounds it can facilitate AI innovation in financial services. As technology and financial services continue to evolve, we believe advancements in AI will flow through Q2, not around it. Looking ahead, we feel very good about the success we've had heading into the final quarter of the year. Our pipeline remains solid. We expect demand to remain strong as we close out 2025 and expect, and as Jonathan will share in a moment, we're raising our financial outlook, reflecting our confidence in our ability to deliver on the full year expectations we set earlier this year.

Before I hand the call over to Jonathan, I wanted to share some exciting updates to our leadership team which we believe will better align our talent and efforts with our long-term strategy. First, Hima Mukkamala has been appointed as our Chief Operating Officer, expanding his role to include our service delivery and customer experience functions. In Hima's time overseeing our engineering team since 2023, he has demonstrated operational excellence and an extreme focus on AI enablement, both to drive internal efficiencies as well as external innovation. In conjunction, Kirk Coleman will continue to lead our go-to-market functions as Chief Business Officer, reinforcing his focus on sales and customer success, leveraging his deep industry expertise to advance our product strategy and next phase of growth.

I want to thank Mike Volanoski, our Chief Revenue Officer, for his contributions during his time at Q2 and he will remain with us through December 12th to ensure a smooth transition. With that, let me pass it over to Jonathan.

Thanks Matt. Our third quarter results demonstrate continued strong execution across several key metrics including revenue and Adjusted EBITDA, both of which exceeded the high end of our previously issued guidance. These results highlight the progress we have made towards our profitable growth strategy, reinforced by the strongest third quarter of bookings in our history and sustained margin expansion. I will now discuss our financial results in more detail and conclude with our guidance for the fourth quarter and full year 2025 as well as an updated financial outlook for 2026. Total revenue for the third quarter was $201.7 million, an increase of 15% year over year and up 3% sequentially. Our revenue growth was primarily driven by subscription based revenues which grew 18% year over year and 4% sequentially.

Subscription revenue as a percentage of total revenue continued to increase, ending the quarter at 82%, highlighting the ongoing shift in our revenue mix towards this higher margin revenue stream. The year over year and sequential revenue growth was primarily driven by a combination of new customer go lives and expansion with existing customers. Our services and other revenues increased 5% year over year, reflecting an improvement compared to the prior quarter's year over year trends. This growth was driven by an easier comp versus the prior year as we lapped the impact from First Republic Bank which we indicated on the prior call. In addition to the easier comp, we benefited from higher professional services revenues from core conversions. These increases helped offset ongoing declines in more discretionary professional service offerings which remain under pressure.

Total Annualized Recurring Revenue or total ARR grew to $888 million, up 12% year over year from $796 million at the end of the third quarter of 2024, driven by strength in our subscription arrangement which grew to $745 million, up 14% year over year from $655 million in the prior year period. Total ARR growth was fueled by continued strength in subscription based bookings across both new and existing customers. As expected, Subscription ARR growth also benefited from a normalization in churn following a concentration of churn in the second quarter and we continue to expect churn in the second half to be more favorable than the first with full year levels remaining in line with or better than historical averages.

Our ending backlog of approximately $2.5 billion increased by $161 million sequentially or 7% and $485 million year over year, representing 24% growth year over year, and sequential increases were primarily driven by expansion with existing customers as well as solid net new activity and was broad based. We entered the year expecting Enterprise and Tier 1 opportunities to be more heavily weighted towards the back half, and that proved out with strong third quarter performance in those segments, which represented the majority of our bookings growth for the quarter, and as we have mentioned previously, the sequential change in backlog may fluctuate quarter to quarter based on the number of renewal opportunities available within that quarter. Gross margin was 57.9% for the third quarter, up from 56% in the prior year period and above the 57.5% we saw in the previous quarter.

The year over year and sequential increases in gross margin were driven by an increasing mix of higher margin subscription based revenues. We continue to expect gross margin to expand in Q4 with full year 2025 gross margin expansion of at least 200 basis points. Total operating expenses for the third quarter were $76 million or 37.7% of revenue compared to $73 million or 41.5% of revenue in the prior year quarter and $75 million or 38.2% of revenue in the second quarter. The year over year improvement in operating expenses as a percent of revenue was driven by G&A which benefited from lower personnel related costs and higher revenues which impacted all categories. Total Adjusted EBITDA was a record $48.8 million, up 50% from $32.6 million in the prior year period and up 7% from $45.8 million in the previous quarter.

We ended the third quarter with cash, cash equivalents, and investments of $569 million, up from $532 million at the end of the previous quarter. As we indicated on the prior call, the third quarter included a material cash payment which drove the slight sequential decline in cash flow in the third quarter. We generated $46 million in cash flow from operations driven by improved profitability and continued effective working capital management and delivered $37 million in Free cash flow. We continue to anticipate the fourth quarter will be our strongest Free cash flow quarter of the year, consistent with typical seasonality. As announced in our press release, Q2's board of directors authorized a share repurchase program for an amount up to $150 million.

Given the significant progress we have made on improving the balance sheet and our cash flow generation, we believe we are in a strong position to exercise all components of our capital allocation strategy. These priorities include investing in the business to elongate our subscription growth trajectory, evaluating opportunities for highly synergistic inorganic growth, retiring our convertible debt, and opportunistically utilizing this share repurchase program over time. Let me finish by sharing our fourth quarter and updated full year 2025 guidance. We forecast fourth quarter revenue in the range of $202.4 million-$206.4 million and we are raising full year revenue to the range of $789 million-$793 million representing year over year growth of 13%-14% for the full year.

We forecast fourth quarter Adjusted EBITDA of $47.2 million-$50.2 million and are raising our full year 2025 Adjusted EBITDA guidance to $182.5 million-$185.5 million, representing 23% of revenue for the full year. Looking ahead, we are also providing an updated financial outlook for 2026. We expect full year subscription revenue growth of approximately 13.5%, which is up from the approximately 13% we previously provided, reflecting the strong bookings momentum we've seen year to date and the durability of our subscription model. Total non-subscription revenue is expected to decline in the mid single digits year over year in 2026, driven by ongoing secular pressure in bill pay and discretionary services revenue. In addition, we expect our full year 2026 gross margins to be at least 60%, and we expect Adjusted EBITDA margin expansion of approximately 250 basis points.

As a result, we are increasing our 2024-2026 three year annualized average Adjusted EBITDA margin expansion target to 450 basis points, up from our previous expectation of 360 basis points. Finally, based on our performance to date and anticipated second half strength, we reiterate our full year free cash flow conversion outlook of at least 90% for 2026. In summary, we delivered a strong financial performance which exceeded the high end of our previously issued guidance. This performance, coupled with our outlook for the remainder of the year, has given us the confidence to raise our full year guidance on both revenue and Adjusted EBITDA for 2025 and our improved 2026 outlook. We remain dedicated to delivering growth, profitability expansion, and strategic capital allocation and believe that our results to date collectively illustrate our progress and potential as we continue to evolve our business and drive shareholder value.

With that, I'll turn the call back over to Matt for his closing remarks.

Thanks, Jonathan. Before we open it up for questions, I'll close with a few final thoughts. In summary, Q3 was another good quarter defined by strong financial results and record third quarter bookings. The record bookings execution was driven by broad-based sales performance with seven total Tier 1 and Enterprise wins. We also shared some exciting developments in our AI journey, showcasing several solutions in development at our Dev Days event that demonstrated how we're using leading-edge AI technologies to empower our customers, their account holders, and partners in the months and years to come. Looking ahead, our record Q3 bookings performance and the strength of our pipeline gives me confidence that we'll close the year strong and enter 2026 positioned for continued subscription revenue growth and an improved profitability outlook. Thank you. With that, I'll turn it over to the operator for questions.