Q2 Holdings, Inc. Q2 2026 earnings call

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. With me on the call 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. 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 second quarter of 2026. A 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. We undertake no obligation to update any such forward-looking statements discussed in this call. 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. 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, good afternoon, everyone. Thank you for joining us today. I'll start by sharing our second quarter results and highlights from across the business. I'll then hand the call over to Jonathan to discuss our financial results in more detail and provide our updated outlook for the remainder of the year. We delivered another strong quarter of execution with financial results that reflect the continued strength of our subscription model, healthy demand for our mission-critical solutions, and the operating leverage we continue to build into the business. In the second quarter, we generated revenue of $219.8 million, representing 13% year-over-year growth. We also delivered adjusted EBITDA of $62.8 million or 28.6% of revenue and generated free cash flow of $51 million.

Overall, we're pleased with the performance of the business through the first half of the year. We continue to see strong engagement from customers and prospects. We're executing well across our major product lines. We believe our platform strategy is becoming even more relevant as financial institutions look to modernize their technology, protect their customers, and begin to leverage Q2 to adopt AI in practical and responsible ways. On the sales front, we had another strong bookings quarter, highlighted by eight total Tier 1 and enterprise wins across the portfolio. The quality and breadth of these wins were encouraging. We saw continued activity across digital banking, risk and fraud, and Relationship Pricing. There were a few specific themes that played out in the quarter, which I'll highlight briefly. First, we've talked about our land and expand model as a key part of our strategy.

Because of the synergy and breadth of our product portfolio today, we have multiple avenues to land a new customer and then expand their relationship with Q2 over time. In the second quarter, we signed a Relationship Pricing deal with a top 25 U.S. bank that provides a powerful demonstration of this dynamic. This customer first signed for our small business and commercial digital banking capabilities in 2023. Last year, they signed an expansion for our risk and fraud products to protect their commercial customers. In the second quarter, after attending our client conference, they signed another significant expansion for our Relationship Pricing capabilities. In just three years, this bank has signed for three of our major product lines, illustrating the significant expansion potential that exists, especially with these larger enterprise customers.

We also view this particular deal as a strong example of the potential for synergy between commercial digital banking and the Relationship Pricing aspects of our solutions. Large, sophisticated commercial banks are increasingly looking to price both sides of the commercial balance sheet in a more integrated way, helping them improve profitability across loans, deposits, and fee-based products. With our combined commercial capabilities, we believe we are uniquely equipped to help them compete for and retain commercial clients. Beyond Relationship Pricing, we continue to see M&A drive meaningful momentum for us in the quarter, which is the second theme I'll highlight. We've talked for years about banking sector M&A as an opportunity for Q2. Historically, that has often been because our customers have tended to be healthy, growth-oriented institutions that are on the acquiring side of transactions.

During the quarter, we had a meaningful Tier 1 win come from the opposite dynamic. In this case, a $2 billion asset size Q2 customer was acquired by a $9 billion bank, and the combined entity made the decision to adopt Q2 across the entire bank in an open, competitive evaluation that included the acquirer's incumbent solution and several others. Wins like this are impactful because they demonstrate the competitive strength of our digital banking solutions. It also shows why we have tended to benefit from M&A amongst our customer base. Whether our customer is the acquirer or the acquired institution, Q2 is often in a strong position when the combined entity evaluates the technology needed to support the next phase of growth post-acquisition. The M&A-related win and the Relationship Pricing expansion are just two highlights from another strong quarter of bookings performance.

We continued to benefit from a healthy balance of new customer activity and expansion with existing customers, we're excited about the momentum we're carrying into the second half. Another major highlight from the quarter was CONNECT 26, our annual customer conference. This was our biggest conference yet, with record customer and prospect attendance. As always, the conference gave us a valuable opportunity to spend time with customers, prospects, and partners, hear directly about their priorities, and share the next phase of our product strategy. The customer engagement at CONNECT was very strong, and one of the clearest themes we saw was the demand for practical AI. Not AI as a broad technology concept, but AI applied to real workflows and use cases that can help financial institutions operate more efficiently, differentiate their digital experiences, and better protect their customers.

As we discussed last quarter, we believe Q2 has several key differentiators in the current wave of AI innovation: data, distribution, incumbency, and trust. Our platform sits in the flow of digital banking interactions, giving us deep banking-specific context that is difficult to replicate. We have an established customer and partner network that can consume AI capabilities as we deliver them. Importantly, our customers trust us to help them apply AI in a secure, compliant, and operationally sound way. At CONNECT, the customer conversations reinforced that our near-term AI product focus is aligned with the areas where financial institutions are actively looking for value, improving efficiency for bankers, helping customers and partners build and personalize digital experiences faster, and strengthening fraud protection. We showcased products tied directly to those priorities. First, we formally announced Q2 Assistant from the keynote stage.

Q2 Assistant is designed to embed AI directly into the digital banking experience so bankers can use natural language to access information, navigate workflows, and ultimately operate more efficiently within the platform. The reception from customers was very strong. In fact, Q2 Assistant was the most frequently demoed item in our exhibit hall, which tells us customers are not just interested in AI in the abstract, they are looking for practical, trusted use cases that can create value inside their institutions. Second, we demoed Q2 Code from the keynote stage. Q2 Code is our AI-assisted development capability designed to help customers, partners, and Q2 teams build on our platform faster using natural language and the power of our SDK. The strategic point is that Q2 Code extends one of our core differentiators, the ability to tailor the platform via Q2 Innovation Studio.

Customers already use Q2 Innovation Studio to extend their digital banking experiences, integrate partner capabilities, and tailor the platform to their needs. Q2 Code is intended to make that process faster and accessible to more builders. They can add custom pages, change the look and feel of their experience, and build entirely new functionality through prompts. In our demos, the customer reaction was clear. They see the potential to move from idea to execution faster and ultimately deeply personalize and differentiate their digital experience with less friction in the build process. We are still early in this journey, but these are not just conceptual demos. Across our AI product set, these capabilities are either in production, moving through early adopter, or being implemented with customers today. We're encouraged that customers are already moving from interest to action, signing on as early adopters in the weeks since CONNECT.

The third major AI product we covered was in the fraud arena, which is one of the areas where we see some of the clearest near-term applications for AI. As we've discussed in recent quarters, the cost and complexity of fraud continues to increase across financial institutions. Today, fraud has become a continuous enterprise-wide challenge that spans retail, small business, and commercial banking, and it is driving increasing levels of attention and investment from our customers. We believe this is a large and growing opportunity for us. As fraud grows more complex and the stakes for financial institutions rise, our view is that financial institutions will look for a platform that sits at the center of the digital banking experience with the data, the distribution, and the trust to act in real time.

That is precisely where Q2 sits, and it is why we believe fraud is one of the most compelling growth opportunities in our portfolio. At CONNECT, we shared our latest fraud strategy and product developments, including our work around Account Takeover. I want to highlight this area because it demonstrates why we believe Q2 is well-positioned to help financial institutions address the growing fraud challenge. Because our digital banking platform sits inside the flow of activity, we have the visibility into behavioral signals and user interactions as they happen. Our new Account Takeover product uses AI to continuously monitor those signals and interactions, identify signs of compromise, and intervene in real time. The customer response was extremely positive. Today, we already have had double-digit customers sign up for the new Account Takeover product, and we're encouraged by the traction this product is already getting with customers.

More broadly, we believe fraud will remain one of the most important investment priorities for financial institutions. The threat environment and vendor landscape are evolving quickly, and customers are looking for trusted partners who can help them simplify their technology while improving protection. We believe Q2 can play that role because of the breadth of our broad solutions, our Q2 Innovation Studio ecosystem, and the central position our platform holds in the digital banking experience. Stepping back from the individual product areas, the overall customer sentiment at CONNECT was very positive. There was clear excitement around AI, and we saw customers move from asking whether AI matters to asking how they can adopt it responsibly and where it can create the most value. That is an important shift. At the same time, our customers were very clear that their traditional priorities remain front and center.

Thanks, Matt. We are pleased to report another quarter of strong financial performance, with second quarter results above the high end of our guidance on both revenue and adjusted EBITDA. We also delivered record results across gross margin and adjusted EBITDA. We retired our last tranche of convertible notes in June. Let me start by discussing our financial results in more detail. I'll finish with our updated third quarter and full-year 2026 guidance. Total revenue for the second quarter was $219.8 million, an increase of 13% year-over-year and 2% sequentially. Our revenue growth was driven by subscription-based revenues, which grew 15% year-over-year and 2% sequentially, and ended the quarter at 83% of total revenue. The year-over-year and sequential revenue growth was primarily driven by a combination of new customer go lives and expansion with existing customers.

Total non-subscription revenues were roughly flat year-over-year, as growth in transactional revenue was largely offset by ongoing pressure in more discretionary professional services offerings. Consistent with our outlook at the beginning of the year, we continue to expect ongoing pressure in our discretionary services revenue. This is contemplated in the updated guidance I will walk through shortly. Total annualized recurring revenue, or total ARR, grew to $971 million, up 13% year-over-year from $861 million at the end of the second quarter of 2025, and up 3% sequentially from $945 million at the end of the first quarter. Our subscription ARR grew to $826 million, up 15% from $716 million in the prior year period, with growth benefiting in part from a favorable comparison to the second quarter of 2025.

Our year-over-year subscription ARR growth was largely driven by bookings from new customer wins as well as expansion with existing customers. Our total ARR growth remains below subscription ARR growth, driven by the trends we've previously discussed related to non-subscription-based revenue. Our ending backlog of $2.8 billion increased by $22 million sequentially or 1%, and increased $404 million year-over-year, representing 17% growth. The year-over-year and sequential increases were driven by booking success across new, expansion, and renewal activity. Non-GAAP gross margin was 62.3% for the second quarter, up approximately 480 basis points from 57.5% in the prior year period, and up approximately 20 basis points from 62.1% in the prior quarter. The year-over-year improvement continues to reflect the completion of our cloud migration earlier this year.

In addition, the year-over-year and sequential improvement in gross margin was driven by the continued shift in our revenue mix towards higher margin subscription revenue. Total non-GAAP operating expenses for the second quarter were $81.7 million or 37.2% of revenue, compared to $74.5 million or 38.2% of revenue in the second quarter of 2025, and $81.7 million or 37.7% of revenue in the prior quarter. The year-over-year increase in operating expenses was driven primarily by higher R&D personnel costs to support our continued product and AI investment. Sequentially, total operating expenses were essentially flat as higher sales and marketing costs from our annual client conference were offset by lower payroll taxes associated with equity vesting and bonus payments relative to the first quarter.

Total adjusted EBITDA was a record $62.8 million in the second quarter, up 37% from $45.8 million in the prior year period and up 5% from $60 million in the prior quarter. Adjusted EBITDA margin was 28.6%, expanding approximately 510 basis points from 23.5% in the prior year quarter and up approximately 80 basis points from 27.7% compared to the first quarter of 2026. The year-over-year and sequential improvement was driven by strong revenue growth and gross margin expansion, partially offset by higher operating expenses. We ended the quarter with cash equivalents, and investments of $106 million, down from $379 million at the end of the prior quarter. The decline in cash was driven by two significant uses of capital in the quarter.

The repayment of our 2026 convertible notes at maturity in the amount of $304 million and $23 million in share repurchases that occurred during the quarter. We generated cash flow from operations of $61 million in the second quarter, driven by profitability growth and solid working capital management, and delivered $51 million of free cash flow. With the retirement of our convertible notes, we ended the quarter debt-free. Combined with our continued strong free cash flow generation, we believe this gives us substantial balancing capacity and flexibility in how we allocate capital going forward. I also want to provide an update on our share repurchase program. As of the end of the second quarter, we had repurchased approximately $125 million of our stock under our existing $150 million authorization announced in November 2025, with approximately $25 million remaining under the program.

Today, I am pleased to announce that our Board of Directors has approved up to an additional $350 million of share repurchases, which brings our total available repurchase capacity to approximately $375 million. This authorization reflects our confidence in the long-term value of our business and our commitment to allocating capital to deliver shareholder value. We remain focused on maintaining a healthy balance sheet and preserving flexibility to support organic investments, inorganic opportunities as they arise, and a patient and disciplined approach to share repurchases. Let me finish by sharing our third quarter and updated full-year 2026 guidance. We forecast third quarter revenue in the range of $218.5 million-$222.5 million, and full-year 2026 revenue in the range of $881 million-$886 million, representing year-over-year growth of approximately 11%.

We are also raising our subscription revenue growth expectation for full-year 2026 to approximately 14.5%, up from our previous expectation of 14%, reflecting the strength of our year-to-date bookings and first half subscription revenue performance. We forecast third quarter adjusted EBITDA in the range of $58.5 million-$61.5 million, and full-year 2026 adjusted EBITDA in the range of $244 million-$248 million, representing approximately 28% of revenue. In summary, we delivered another record quarter of revenue and adjusted EBITDA, with both finishing above the high end of our 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 2026.

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 and opportunistic capital allocation from a position of financial strength. We believe that our results to date 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. To wrap up, we're pleased with our second quarter results and the momentum we've built through the first half of the year. We delivered strong financial performance, continued to execute across our major product lines, and saw healthy demand from both new and existing customers. We believe our bookings performance in the quarter, including eight total Tier 1 enterprise wins, reinforces the value of our platform and the breadth of opportunity we have across digital banking, Relationship Pricing, and fraud. CONNECT 26 also gave us a clear view into what our customers are prioritizing. They are focused on growing and retaining deposits, protecting their customers from fraud, operating more efficiently, and investing in AI in practical, secure, and compliant ways. Those priorities align directly with the areas where we have and continue to build meaningful capabilities and differentiation.

As we enter the second half of the year, our pipeline remains healthy, customer engagement remains strong, and we feel good about our ability to continue executing against our strategy. With that, operator, we're ready to open the call for questions.