Q2 Holdings, Inc. Q4 2025 earnings call

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our fourth quarter and full year 2025 conference call. With me on the call today are Matt Flake, our CEO, and Jonathan Price, our CFO. 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 annual report on Form 10-K for the full year 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 the 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 have also published additional materials related to today's results on our Investor Relations website. Let me now turn the call over to Matt.

Thanks, Josh, and good afternoon, everyone. Thank you for joining us today. I'll start by walking through our fourth quarter results and highlights, then step back and recap full year 2025 performance before sharing the key themes that define our strategy as we enter 2026. I'll then hand the call over to Jonathan, who will cover our financial performance, provide guidance for 2026, and share our new financial framework. Starting with the fourth quarter, we delivered a strong finish to the year with performance that reflects solid execution across bookings, revenue, and profitability. In the fourth quarter, we generated strong year-over-year subscription revenue growth of 16%, expanded our Adjusted EBITDA margins by over 400 basis points year-over-year, and produced meaningful free cash flow of $56.6 million.

While Jonathan will walk through the numbers in more detail, the headline is that we closed the year with strong results across all of our key financial metrics. We had an outstanding quarter on the bookings front. The fourth quarter was our second-largest bookings quarter in company history and came directly on the heels of a record third quarter. This performance underscores both the strength of demand and our ability to execute, particularly in larger, more complex deals. As we said at the start of 2025, we expected our larger deals to be weighted toward the back half of the year, and that expectation continued to play out in the fourth quarter.

With eight total Tier One and enterprise deals, notable wins included a Tier One institution that purchased both relationship pricing and commercial digital banking, a $40 billion digital banking customer that expanded its commercial and new fraud products, and a Helix deal with a top 5 credit union. Within our sales execution during the quarter, we continued to see a healthy balance of net new and expansion activity, which remains a defining characteristic of our bookings performance. Stepping back to the full year, 2025 was our strongest year as a company across bookings, revenue, and profitability. On the sales front, we executed well in a strong demand environment. We saw consistent activity up market throughout the year with a total of 26 enterprise and Tier One deals.

Expansion continued to play a critical role in our bookings profile, with half of those Tier 1 and enterprise deals coming from expansion with existing customers and the other half driven by new logos. Those wins came from across the product portfolio, and we feel good about the momentum in each of our major product areas. Our Digital Banking Platform provided a strong foundation for our booking success, contributing a diverse range of deals across banks and credit unions, large and small, retail and commercial, demonstrating the competitive strength of our platform approach. Relationship pricing delivered solid performance throughout the year, highlighted by strong net new execution in the Tier 1 space, the successful go-live of a top five bank, and long-term renewals with multiple top 10 U.S. bank customers. Risk and fraud remained one of our fastest-growing product lines in 2025 as well.

Financial institutions are increasingly prioritizing investment in fraud mitigation solutions, and as a result, our risk and fraud solutions consistently performed as standalone products helping new customers for Q2 and regularly showed up as our top cross-sold product as well. They also contributed meaningfully to our success up market throughout the year, including the largest fraud deal in company history with a $200 billion bank. Lastly, as bank M&A activity began to pick back up in 2025, it contributed positively to our business as institutions continued to overwhelmingly choose Q2 solutions post-transaction. Of the M&A deals involving a Q2 customer in 2025, 93% of them chose Q2 as a go-forward solution. We believe our experience in effectively executing post-acquisition technology conversions is a competitive advantage for us and one that helps our customers de-risk their transactions and realize value in their M&A deals.

Looking beyond sales and product success, 2025 was also a year which we successfully executed against our profitable growth strategy. Today, we'll unveil a new financial outlook, which Jonathan will share shortly. With that in mind, I want to take a minute to share our product strategy and why we're confident in our ability to execute against our long-term vision. At the core of our business is digital banking, where our single-platform approach continues to resonate. With a heightened focus on deposit growth and retention, our platform gives financial institutions the ability to streamline their technology environments while also providing best-in-class experiences that help them compete for, win, and retain critical relationships across retail, small business, and commercial customers. Within the single platform, our commercial banking solutions remain a particularly important growth driver.

We believe the maturity of our commercial solutions, combined with the usability of our modern interface, give us a durable competitive advantage. To demonstrate the scale of our commercial solutions, in 2025, we processed over $4 trillion in transaction volume, representing 21% year-over-year growth, with December being our first month ever to break $400 billion in transaction volume. As customers continue to invest in modernizing their commercial capabilities to support deposit growth, improve profitability, and compete more effectively up market, our scale and continued investment translated directly into both new wins and meaningful expansion opportunities. Rounding out the digital banking story, Innovation Studio has become a foundational component of our strategy. In 2025, nearly every net new digital banking deal included Innovation Studio, and we continue to see it deepen relationships with existing customers. It's enabling faster product delivery, better economics, and stronger engagement.

As new priorities like AI emerge in financial services, we believe Innovation Studio puts Q2, our partners, and our customers in position to adapt swiftly, reinforcing Q2's role at the center of innovation in the banking industry. Relationship pricing is another area where we continue to see strong demand. Customers are using these solutions across loans, deposits, and fee-based products to enhance profitability and improve consistency across their organizations. We believe this is a best-in-class solution in an area of growing demand, and it remains a key entry point into some of the largest financial institutions in the country. Lastly, as we look ahead to 2026, risk and fraud has emerged as one of the most strategically important areas in our portfolio. As financial institutions elevate their focus on fraud mitigation, fraud is no longer episodic or confined to a single channel.

It's continuous, cross-channel, and embedded in nearly every digital interaction across retail, small business, and commercial banking. As a result, financial institutions are placing greater emphasis and greater investment on modernizing how they manage fraud. At the same time, the traditional approach of relying on fragmented point solutions is becoming increasingly complex and costly. While these tools can be effective in isolation, managing fraud across a growing number of channels and threats requires faster coordination, better visibility, and the ability to respond in real time, something that can be difficult to achieve with disconnected systems. We believe Q2 is uniquely well-positioned to meet this moment. Our standalone risk and fraud solutions continue to be strong land-and-expand products for the business, including with some of the largest enterprise and Tier One institutions.

Customers frequently adopt multiple fraud solutions over time, and fraud-led relationships often expand into broader partnerships across the Q2 portfolio. In addition, because of the central role our Digital Banking Platform plays in customers' operations and data flows, we have earned access to the data, signals, and real-time contexts that are increasingly critical to fighting fraud more holistically. Looking into 2026, we believe this combination of proven standalone solutions and a platform-level approach position us well to capitalize on growing demand and help financial institutions address fraud more effectively. Before I hand it over to Jonathan, I want to spend a moment discussing our approach to AI, which we view as an important enabler of our long-term strategy for a few key reasons. First, we believe our single platform puts us in the best position of any financial institution partner to deliver meaningful AI innovation.

We occupy the center of our customers' digital experiences in retail, small business, and commercial relationships. This allows us to deliver AI solutions that execute high-value banking operations for both bankers and end users across a wide range of use cases. Second, because of that privileged position, the data that powers our platform makes us the system of context for our customers. For financial institutions, the core processor serves as the transactional system of record. At Q2, however, we sit in the flow of every digital interaction and see every login, transaction, alert, message, and user decision, coveted data that gives us the real-time signals needed to understand what's happening and what should happen next.

The most effective AI solutions rely on specific context to create value, and we believe that the rich data we generate in the platform gives us a tremendous amount of banking-specific context that can be additive to value generation and differentiated from other solutions. Finally, after many conversations with customers over the past few years, we firmly believe that our regional and community financial institutions will depend on us as a trusted partner as they go on this journey with AI. Because of our strategic role and experience in supporting digital innovation for our customers, we believe it's our duty to help our customers navigate AI, just like we did with internet banking, mobile, and cloud. Our customer-based and established ecosystem model opens a valuable distribution channel to other AI innovators looking to serve this market efficiently.

Thanks, Matt. We're pleased to announce fourth quarter and full year results that outperformed the high end of our guidance as we delivered strong results across several metrics which demonstrated continued execution of our profitable growth strategy. We saw growth in our subscription-based revenues, advanced our operational efficiency, and exceeded our free cash flow conversion target of at least 90%, enabling us to improve capital allocation. We believe our record backlog and solid subscription ARR growth positions us well for continued success in 2026 and beyond. With that, let me start by discussing our financial results in more detail, and I'll finish with our 2026 guidance as well as our longer-term financial framework. Total revenue for the fourth quarter was $208.2 million, an increase of 14% year-over-year and 3% sequentially, driven by subscription-based revenues resulting largely from the delivery of new customer go-lives and expansions with existing customers.

Total revenue for the full year was $794.8 million, up 14% from the prior year, representing our highest annual growth rate since 2021. Subscription revenue growth for the full year was 17% and represented 82% of total revenue. Based on the strength in subscription-based bookings we observed throughout 2025, we expect a mix of this high-margin revenue stream to continue increasing as the percentage of our overall revenue mix in 2026. Total non-subscription revenues increased by 2% for the full year in 2025, partially driven by an increase in services revenue, which benefited from an easier comparison versus the prior year, as well as higher professional services revenues primarily driven by M&A-related core conversions. Total annualized recurring revenue, or total ARR, grew to $921 million, up 12% year-over-year from $824 million at the end of the fourth quarter of 2024.

Our subscription ARR grew to $780 million, up 14% from $682 million in the prior year period. Our year-over-year subscription ARR growth was largely driven by bookings from new customer wins as well as expansions with existing customers. Our total ARR growth remains below subscription ARR growth, driven by the recent trends we've discussed in non-subscription-based revenue over the last few years. Our ending backlog of $2.7 billion increased by $175 million sequentially, or 7%, and $472 million year-over-year, representing 21% growth. The year-over-year and sequential increases were supported by bookings success across new, expansion, and renewal activity. While we continue to see ample opportunity ahead, 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.

Our trailing 12-month total net revenue retention rate for 2025 was 113%, up from 109% in 2024. When looking at only subscription-based revenues, our subscription net revenue retention rate ended the year at approximately 115% compared to 114% in 2024. Our revenue churn for 2025 was 5.2% compared to 4.4% in 2024, reflecting an increase in overall M&A activity year-over-year. As a reminder, heading into the year, we expected a higher level of M&A activity relative to prior years. As Matt mentioned, we continue to be selected as the go-forward solution in the vast majority of M&A transactions within our customer base. While this activity can influence churn trends in a given period, M&A has consistently been a net positive as we have largely retained and expanded our relationships as a result of those transactions.

Gross margins were 58.6% for the fourth quarter, up from 57.4% in the prior year period and 57.9% in the previous quarter. Both the year-over-year and sequential increase in gross margin were driven by an increasing mix of higher-margin subscription-based revenue. Gross margins were 58% for the full year, up from 56% in the prior year, representing approximately 200 basis points of improvement. This margin expansion was driven by an increasing portion of subscription revenue in our overall mix, coupled with enhanced operational efficiencies from our global workforce, and partially offset by increased costs related to our cloud migration, which we completed in January 2026. Total operating expenses for the fourth quarter were $78.9 million, or 37.9% of revenue, compared to $75.4 million, or 41.2% of revenue in the fourth quarter of 2024, and $76.1 million, or 37.7% of revenue in the previous quarter.

The year-over-year improvement in operating expenses as a percent of revenue was largely derived from continued scaling across G&A and sales and marketing, while the modest sequential increase was driven by higher research and development costs as we continued to invest across the areas Matt discussed earlier. Full year operating expenses of $306.7 million represented 38.6% of revenue in 2025, down from 42.3% of revenue in the prior year period. The improvement in operating expenses as a percent of revenue for the full year was driven by higher revenues and a focus on operational efficiency, primarily manifested within G&A and sales and marketing. We ended the year with 2,549 total employees, up from 2,476 at the end of 2024, with the majority of additional resources onboarded within R&D.

Total adjusted EBITDA was a record $51.2 million in the fourth quarter, up 36% from $37.6 million in the prior year period and up 5% from $48.8 million in the previous quarter. Full year adjusted EBITDA was $186.5 million, up 49% from $125.3 million in the prior year, with adjusted EBITDA margins up by approximately 550 basis points as we continue to mix towards higher-margin revenue streams and drive operational efficiencies across the business. We ended the quarter with cash, cash equivalents, and investments of $433 million, down from $569 million at the end of the previous quarter, driven by the retirement of $191 million of 2025 convertible notes that matured in November, as well as the repurchase of $5 million of our stock in the open market.

We generated cash flow from operations of $64 million in the fourth quarter, driven by new bookings, larger annual invoices, and seasonal strength in working capital. We also generated Free Cash Flow of $57 million in the quarter, resulting in Free Cash Flow for the year of $173 million, representing a 93% Free Cash Flow conversion rate as a percentage of Adjusted EBITDA. This better-than-expected conversion rate was attributable to increased focus on profitability across the business, streamlined operational processes, and effective working capital management. Let me finish by sharing our first quarter and full year 2026 guidance. We forecast first quarter revenue in the range of $212.5 million-$216.5 million and full year revenue in the range of $871 million-$878 million, representing year-over-year growth of approximately 10% for the full year.

We previously communicated the expectation for full year 2026 subscription revenue growth of approximately 13.5%, and we are now raising that outlook to at least 14%. We forecast first quarter adjusted EBITDA in the range of $52.5 million-$55.5 million and full year 2026 adjusted EBITDA in the range of $225 million-$230 million, representing approximately 26% of revenue for the full year. We are now in the final year of the three-year framework we introduced in February of 2024, and we have meaningfully outperformed those initial goals. Those targets called for average subscription revenue growth of approximately 14%, average annual adjusted EBITDA margin expansion of 300-400 basis points, and free cash flow conversion greater than 70% of adjusted EBITDA.

For that three-year period, we are now expecting average subscription revenue growth of approximately 16%, average annual Adjusted EBITDA margin expansion of at least 450 basis points, and free cash flow conversion continuing to exceed 90%. This represents meaningful outperformance relative to our initial three-year framework and reflects the consistency of our execution, the strength of our business model, and the discipline of our team. As we enter the final year of our previous framework, we are taking the opportunity to provide additional clarity on how we think about the business beyond 2026. This includes both our initial expectations for 2027 and a longer-term financial framework that reflects the operating leverage of our business model. Starting with initial expectations for full year 2027, we are targeting annual subscription revenue growth between 12.5%-13% and Adjusted EBITDA margin expansion between 150 and 200 basis points.

We are also introducing longer-term profitability targets of where we expect the business to operate over approximately the next five years. By the end of 2030, we believe the business will achieve non-GAAP gross margins of at least 65% and Adjusted EBITDA margins of at least 35%. These are not near-term objectives, nor will we necessarily have a linear progression over this time period, but these targets reflect our longer-term expectations as operating leverage continues to build in the business. In summary, we delivered strong results in 2025, finishing the year ahead of expectations and above the high end of our guidance, while also driving meaningful expansion in profitability and cash flow conversion. As we enter 2026, we're raising our subscription revenue outlook for the year and providing a clearer view into how we believe the business can perform as it scales.

We intend to continue to execute on our profitable growth strategy by balancing investments to sustain durable subscription revenue growth and drive operating leverage over time while prioritizing effective capital allocation. With that, I'll turn the call back over to Matt for his closing remarks.

Thanks, Jonathan. I'll close by stepping back and putting the year into perspective. 2025 was a defining year for Q2. We've delivered strong execution across bookings, revenue, and profitability. We're seeing demand across our major product lines, digital banking, relationship pricing, and risk and fraud, and we're seeing that demand show up in larger deals with both new and existing customers. Expansion continues to be a defining characteristic of our business, and our customers are choosing to deepen their partnerships with Q2 because our platform is delivering real value across their most critical priorities.

As we move into 2026, we do so with a strong pipeline, a clear strategy for profitable growth, and a platform that we believe positions us at the center of the next phase of innovation and banking, whether it be deposit growth, fraud management, or AI, we're confident in our ability to continue executing, investing thoughtfully, and delivering value for our customers and our shareholders. With that, operator, let's open the call up for questions.