Q2 Holdings, Inc. Stock

Good afternoon. My name is Kevin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] I will now hand the conference over to Josh Yankovich, Investor Relations. Sir, please begin.

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, 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 second quarter of 2026, 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 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 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, and 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 8 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. And in the second quarter, after attending our client conference, they signed another significant expansion for our relationship pricing capabilities. So in just 3 years, this bank has signed for 3 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. And 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 acquirers 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 2 highlights from another strong quarter of bookings performance.

We continue to benefit from a healthy balance of new customer activity and expansion with existing customers, and 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 here 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 is 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. And importantly, our customers trust us to help them apply AI in a secure, compliant and operationally sound way.

At CONNECT, the customer conversations reinforce 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 as system 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 innovation studio to extend their digital banking experience, 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 prompt.

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, and we're encouraged that customers are already moving from interest to action signing on as early adopters in the week 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 in the 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 customer 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 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. They need to grow and retain deposits. They need to protect against fraud, they need to drive engagement, they need to operate more efficiently and they need technology partners who can help them do all of that in a secure, scalable and compliant way. That is why we feel good about our position, the areas where customers are investing, digital banking, fraud, commercial growth, platform extensibility and practical AI are all areas where Q2 has built meaningful capability and differentiation.

When you combine our strong second quarter execution with the quality of our bookings activity and the customer engagement we saw at CONNECT, we feel good about our momentum as we enter the second half of the year. Our pipeline remains healthy, including opportunities in larger enterprise and Tier 1 accounts, and we continue to see solid demand across digital banking relationship pricing and risk in front. We're pleased with where we stand against our financial expectations for the year, and Jonathan will discuss our annual guidance for 2026 in more detail.

With that, I'll hand the call over to Jonathan.

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, and we retired our last tranche of convertible notes in June.

Let me start by discussing our financial results in more detail, and 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 in 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, and 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 previously discussed related to nonsubscription-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, 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 2 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 balance sheet 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 investment, 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 to $222.5 million and full year 2026 revenue in the range of $881 million to $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 to $61.5 million and full year 2026 adjusted EBITDA in the range of $244 million to $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, continue 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 8 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.

[Operator Instructions]

And your first question comes from the line of Alex Sklar with Raymond James.

Matt, maybe first one for you. As you bring more agentic solutions to market, particularly on the fraud side, and you talked about your core digital banking customers seeing the road map with areas like Q2 Code and Assistant, can you talk about how that's catalyzed any change in those core digital banking cross-sell opportunities between commercial and consumer or just win rates broadly?

Yes. Thanks, Alex. As I talked about it, when we talk to the customers at CONNECT, what was interesting was how they're leaning on us and looking to us to provide AI solutions. And so as the trusted partner of theirs, it is something that is creating opportunities. We talked about the lines that formed around our Code, Assistant and fraud product for AI, which Assistant actually had the most attendance at the booth to see it. So what's happening is it drives confidence in our ability to deliver the technology, which helps with renewals, helps with extensions, helps with cross-selling other products.

And then on top of that, these products are hitting right where our customers want it. They want to protect deposits. They want to make their bankers more productive and then ultimately personalize these experiences for different initiatives that they have for whether it's commercial or retail customers. So not ready to roll out the financial gain from these products, but the energy and the excitement around it is going to add a lot to cross-selling with existing customers. And I think it's also going to help us win a lot of net new deals because there's not a lot of vendors in the space that are bringing real AI solutions that solve those problems I talked about to the table. So it's really exciting, and it's exciting to see the folks that are working on these products be rewarded with so much interest and engagement and to have these products in early adopter phase is exciting.

All right. Great, Matt. Well, that's more to look up for there. Jonathan, maybe a follow-up for you. You completed the cloud migration earlier this year. I know you've talked about kind of a multiyear optimization opportunity, but now with kind of 6 months under your belt. Maybe just update us on what you see as far as the subscription gross margin opportunity over the next couple of years?

Yes. Thanks, Alex. Yes, look, I mean, we're continuing to operate in this new environment, and we're pleased with the progress we've made to date and learning and understanding how to operate. I won't say optimal yet, but certainly more effectively than at the beginning. And when I think about the road map for subscription gross margins obviously, from a total revenue perspective, we continue to expect the mix to increase towards subscription. So from a total gross margin perspective, that's definitely going to have an upward pressure on it in terms of the next few years.

But then there are so many other initiatives in place, not just cloud optimization, but as we think about the future of AI and we think about efficiencies around the organization to continue to work on achieving our long-term gross margin goal that we put out there at the beginning of this year. So we feel good about the direction we're going. Obviously, this year was the big step function that we talked about leading into 2026. And so now we just got to keep executing against these other initiatives. But so far, so good in terms of how we're operating post cloud migration.

And your next question comes from the line of Andrew Schmidt with KeyBanc.

Good results. I wanted to just ask a question on the environment. A big question we had heading into earnings was just on sort of budget shifts and priority to traction and things like that. Obviously, look, it looks like you guys demand, if anything, is strengthening. So it doesn't seem like you've seen that. But maybe talk a little bit about prioritization when it comes to spend. And whether there have been any budget shifts that you're picking up or sort of distractions when it comes to sort of AI implementation, things like that.

Yes, Andrew. I mean, the AI stuff is interesting to talk about with the prospective -- the prospects that are out there and the customers. But as I said in the script, at the conference, they want more commercial functionality, they want -- it could be bulk wires, it could be ERP integration. It could be in broader entitlement engine. So there's -- that's what's driving their business. Now the commercial customers, getting those deposits, the fees they can generate off of those, and that's driving a lot of the demand for us. Also, fraud is clearly a hot topic for them, and it's prevalent everywhere, whether it's in person, social fraud that's occurring when they're using people to manipulate it or actually transactions where somebody does account takeover.

So those are big topics. Clearly, relationship pricing, pricing these relationships is more complicated when rates are where they are and the different dynamics that are out there, relationship pricing was the bell of the ball this quarter. And then innovation studio being able to bring a lot of the new innovation that's coming from start-ups that have features or products are a big part of this. So there's just the technology spend, it feels like it's going from leaving the back office general ledger kind of run the bank stuff to change the bank, and that's -- we're at the center of that, and that's what the opportunity has been for us, and that's why we continue to see this demand environment that we've seen and we continue to do well in it.

That makes sense. That's very encouraging. Appreciate that. The other encouraging thing that I picked up was just the sort of the pent-up demand around some of the AI products, particularly Assist and et cetera. Maybe just help us [indiscernible] timing, time to revenue, those sorts of things. Obviously, look, you're right. I mean, the core solutions are what's key, but obviously, these are important to sort of potential 2027 and 2028 beyond revenue contribution. So maybe just anything on sort of GA time to revenue and then pipeline and AI SKUs more broadly would be great.

All right. Well, so on the EA side, I think we'll be in general availability for those products in the fourth quarter. And the number and all that -- the revenue is going to come through, we would like to get another quarter before -- quarter or 2 before we start sharing how that's going to flow through the P&L. But as we talked about, we have double-digit people in EAs right now for the fraud product and single digits on Code and Assistant. So that number should be growing. We're going to be patient. You got to get it right early and then you can have -- it will proliferate throughout the rest of the customers. But right now, there's lines forming. We've just got to get -- make sure we get it right and get the products up and doing what they say they're going to do.

And Andrew, on the time to revenue question, it's still early, we're experimenting in EA. And the good news of having double-digit customers already on the fraud side is can start to see what delivery will look like at scale and make sure that our time to revenue assumptions make sense as you think about scaling this product and the others over the course of time. So what I can say for certain now is the delivery time line and the conversion to revenue will be materially faster than, let's say, a digital banking implementation or a relationship pricing implementation more akin to some of our cross products, if not faster. But it's too early for us to lock in on an exact time to revenue guidance for you all here, but we hope to have a lot of clarity on that as we get through the rest of the year.

And your next question comes from the line of Ella Smith with JPMorgan.

The second quarter tends to be a seasonally softer quarter for net new subscription ARR yet this print looks like 1 of your stronger second quarters in recent history. Can you help us understand how much of the recent broad tech and relationship pricing wins already flowing through into ARR this quarter versus how many quarters away we are before those larger deals begin to show up in a more meaningful way?

Yes. Thanks, Al. So a couple of things I'll point out on this. I mentioned this in the script, but strong first half on the subsea across the portfolio. But in particular, the second quarter did benefit from a favorable comp. And so it's worth noting that if you back out some of the dynamics from Q2 of 2025, it's very similar to what Q1 would have looked like in terms of subs ARR growth from a year-over-year perspective. So Q1 and Q2, even though you saw some acceleration in Q2, and we're pleased about that. There was a benefit there given what Q2 included last year.

When it comes to -- you're right, certainly, this quarter, we had strong success when it comes to the relationship pricing side of the business and some large bookings there. But I wouldn't necessarily call out those deals as being drivers any more so than all the wins and success we're having on the fraud side, on the digital banking side, obviously. And then a lot of the cross activity continues to be strong, including with these new products. So we continue to feel good about the pipeline and the opportunity set going forward.

And again, I would look to the subs ARR, if you look at sort of where subs ARR year-over-year growth rates were in the middle of last year and then you think about our guide for the rest of this year, kind of tells you how we're looking at the second half when it comes to sub revenue growth. And then our job is to go and execute on bookings here the rest of the year and set ourselves up for a strong 2027.

Very clear. And for a follow-up, digital banking implementations have historically been lengthy and complex do you see a realistic path to using AI to meaningfully compress implementation time lines, taking weeks or even months off the process over the next few years? Or do you view the nature of the work as largely outside of the scope of what AI can address?

Yes, , I would say that what we've seen, and we've talked about this before is that the customer sign up for an implementation that's either 9 or 12 months, depending on the size of the financial institution, could be 6. And that's the time line they have for that project. What we're trying to do first is to make our teams more efficient. So if they carry 3 projects at a time, they can carry 4 or 5. And then ultimately, some of that work should translate to making it easier for the financial institution to implement it. It's still early.

We're widely using AI within our delivery teams to make them more efficient. We're seeing some gains, but it's going to take some more time around that. But I think, ultimately, what we want to do is make the implementation more efficient for us, which should translate to making it easier for them in the long run and provide them with tools as well to make it easier for them as well. But that's going to take some time, but those are things that we are hard at work on.

Your next question comes from Terry Tillman with Truist.

Yes. Can you hear me okay? Wonderful Jonathan and Josh follow-up as well. Matt, I think the quote was bell of the ball for relationship pricing. You did mention it a bunch, but you did also talk about risk and fraud a bunch to even in the press release. I'm just curious, and I get a lot of questions on this. I mean it's a very topical area. Anything more you can share in terms of -- or peel back the onion in terms of is the risk and broad business something that's going to well outgrow your subscription overall revenue growth for some time. I mean just kind of -- where do you think you are in terms of like innings in terms of monetizing the set of products there within your installed base? And then I had a follow-up.

Yes, Terry, maybe I'll take that one. I mean, certainly, when you take the fraud portfolio overall, it is growing at a premium to the total of the business. And we think there's an opportunity for that to be true for years to come, especially when you think about the new fraud AI products that we just talked about at length with UAM, Obviously, early days there, but I feel really good about that opportunity and the durability of it and the runway ahead. So from a fraud perspective, definitely think there's an accretive growth story there.

Also, Terry, I mean the fraudsters are unfortunately innovating as well. So this has got a long tail to it. we've got to continue to compete with the weapon and bring a shield and then they bring a new weapon and we've got to develop a new shield and it's kind of never ending. So we're -- that's unfortunate, but that is what it is.

Understood. Good point on that. And I guess the follow-up, Matt, you actually had -- I think it was in your prepared remarks, the synergies between commercial banking and relationship pricing. I know there is a lot more to relationship pricing than just like the loan books and just pricing on loans. You did call that out. Are the synergies going to help just drive more relationship pricing and upselling there? Or does it actually go the other way sometimes now with these synergies, and it's driving even more commercial banking transactions or upselling?

Yes, it's a good question. I would I don't have all the data in front of me, but I would probably say that we're having more success selling relationship pricing to an existing commercial customer. But I think they're beginning to see some opportunities because we're developing a deeper relationship with these customers on both sides, and they begin to trust us, understand the quality work that we do, that we're a client-first company.

And so those are creating more opportunities for us as financial institutions look to consolidate the number of vendors that they work with and the breadth of our product suite is something that our success -- our customer success team does a fantastic job of going out and making sure in strategic conversations with them that they understand all that we offer. So right now, I'd say it's more relationship pricing being sold to our commercial customers. But -- we'd like to see more of those relationship pricing customers by commercial. Now keep in mind, those are some of the -- I think we have 9 of the 14 largest banks in North America. So those will take some time, but we're working those angles as well.

Your next question comes from the line of Parker Lane with Stifel.

Maybe sticking with risk and fraud. Obviously, the opportunity is huge here, and it's increasingly a big priority for your end markets. I was just wondering if you can comment on not just the opportunity growing, but your own competitiveness in this market. If you compare win rates today to maybe a couple of years ago, those meaningfully improved as well? And if so, can you talk to some of the advantages of of working with Q2 for the full suite, including risk and fraud versus multiple vendors there?

Yes, Parker, I don't have the win rates here, but I would think they would be up year-over-year for the last couple of years just because of the innovation and the progress we've made there. The real value prop is when you have a single platform for retail, small business and corporate banking, you have all the data and then you have -- it's all in one place, and you can use that data to identify behaviors of people that -- how they act, how they react when they log in, who they pay, when they pay, how often they pay, the Fed district they pay. You can begin to use that data to your advantage to notice behaviors that fall outside of that.

So for us, it's -- the advantage is with a single platform, we're able to look at all that data comprehensively and provide solutions that stop the fraud based on not just did they enter the login ID and password, but do their behaviors match how they normally behave as opposed to fraudster. So it's a huge advantage for us. And I think it's why you see us differentiating ourselves in the sales organization and the success organization lead on their front foot when we're selling fraud products because we're extremely confident in our capabilities.

I appreciate that, Matt. And then Jonathan, 1 for you. Looking at the subscription revenue outlook, I think it ticked up 50 bps, '27 unchanged, seems like renewal cross-sell going very well. Maybe you could provide some color on what you're seeing from a net new perspective and how your confidence has built and the outlook for that piece of the business for the balance of '26 and in '27?

Yes. I mean, obviously, pleased with the execution year-to-date. And as we continue to look in the back half, the opportunity on net new -- independent of what looks great in terms of the opportunity, obviously, still on cross and renewals is very large and skews more to the Tier 1 and enterprise space like similar to the mix we saw last year. And so obviously, we got to go execute and have a big second half when it comes to those larger opportunities. But the net new in front of us is broad-based.

And it's, like I said, mixed heavily towards Tier 1 and enterprise, especially in the fourth quarter. So I feel good that we can continue if we execute to see that same dynamic on the net new side. And then you're right, especially as we get into 2027, we're going to have a lot of renewal and cross-sell opportunity, especially when you just think about these new products getting out of EA and into GA, especially by the beginning of 2027, we're going to be very focused on widely distributing these products and making sure we've got the value capture dynamics right and that we can deliver a value prop that allows for these products to be a meaningful contributor. So a big part of the story as we enter 2027 because that can be a huge contributor on the cross and expansion side.

And your next question comes from Matt VanVliet with Cantor Fitzgerald.

On guess following on a couple of these others. But as you look at the cross-sell pipeline ahead of you and Matt, you mentioned customer engagement continues to improve. I guess if you had to stack rank where the opportunities are going ahead between expanding digital banking footprints, selling in some of this relationship pricing, but then also including things like innovation studio and some of these -- where should we expect the most movement in terms of revenue growth over the next couple of years? And how might that dynamic change as you look out 5-plus years from here?

Well, 5 years, Matt. I don't know if I can do that. But I will say that it's a tough question to answer, which is probably a good question, but it's -- I was with a bank a couple of weeks ago that is running our commercial product and they're running a legacy product for retail. And they just said, it's so frustrating for our commercial customers that use our retail platform because the commercial product is so much easier to use than the retail one. So we just need to switch and get it all on a single platform. There's opportunities like that all over in our customer base, especially in the upper end of Tier 1 and enterprise where we can go cross-sell those products. Then you get into the fraud conversation, and you talked about what I said earlier about the power of the single platform in the fraud business. Relationship pricing, clearly, we're beginning to show a lot of success there. Innovation Studio is an endless opportunity with our customers with more than 200 partners in there.

So -- and then you add in our growing confidence in our AI capabilities and our AI products, there's a lot there. I would probably think that fraud, innovation studio and our AI products will certainly have a very long tail on them, as I said earlier. But digital banking, we're adding new deals every quarter and some of them are buying one aspect of the product rather than commercial or retail. So there's just a lot of opportunity in the breadth of products that we're rolling out and our focus on customer experience is -- seems to be a big differentiator for us.

All right. Very helpful. And then Jonathan, on the margin expansion, obviously, continues to be very strong here, but you highlighted OpEx continuing to grow. Obviously, the business is growing, and that's a requirement. But how should we think about the pace of OpEx growth over the next couple of years? Are there any major sort of step function investments you feel like are needed? Or have you made a lot of those and a lot of the internal efficiencies you're going could see greater upside as growth continues and you just get sort of general leverage in the business?

Yes. I mean it's sort of all of the above. I mean, when you think about now what we've done year-to-date in '26 and with lifting our EBITDA guide for the rest of the year, you're seeing some pretty strong outperformance in terms of operating leverage both from the gross margin step up in the first half and ongoing OpEx leverage in the back half. As you step forward beyond 2026, I would continue to lean on our long-term framework, which we still have conviction in. I mean, obviously, with the outperformance this year, the bar is higher, but we feel good about the continued opportunities.

And obviously, there is a new, I'll just call it, line item in the P&L when it comes to AI-related infrastructure costs and token costs and the like. And when I think about the guidance we have for the rest of '26 and how we're thinking about planning for '27, we think we have a pretty good handle on that incremental spend relative to, obviously, a couple of years ago where it didn't exist. So right now, it's -- we're just focused heads down executing and I think there continues to be a margin expansion story here. And obviously, the investments that you've talked about just now that we continue to make even here heavily in the third and fourth quarter of '26, we think are foundational to continuing the subscription growth trajectory that we're on.

So we're kind of trying to do both concurrently, and we feel good about that path. So I wouldn't add anything quantifiably beyond '26 other than what's already out there in terms of the long-term framework though.

Your next question comes from Dan Perlin with RBC Capital Markets.

Great quarter, and congrats on repaying the convert. I'm sure that was a huge burden to get rid of. Jonathan, I actually wanted to follow up on exactly what you just said about token costs and understanding the dynamics about how that might play through over the course of the next 12, 18, maybe 24 months. So like maybe can you just talk about how you've gotten comfortable with that, what the model looks like? I'm assuming it's token plus a margin to cost us some sort of margin. But just anything you could provide there as we think about that part of the business ramping. It feels like it's a sizable blind spot for a lot of clients also. But at the same time, you guys can maybe provide some scale to those clients, and therefore, it's a huge benefit to them. So just any of those dynamics would be helpful.

Yes, it sounds like you're talking about the cost structure of the external products. Most of what I was referring to in the prior answer was really about our cost internally when it comes to everything we're doing with AI, including building those external products. In terms of how we're managing the cost structure, again, we're in EA on the 3 that we've announced and talked about, we think we have the proper guardrails in place in terms of caps and the ability to throttle token utilization embedded in the product, and we have a pricing scheme that will manage that.

Internally, we're very, very focused on model management and enablement of the organization to optimize for things like cashing and effective prompting, ultimately to just bend the curve of what we've seen throughout latter part of '25 and through here July of '26, where the run rate is exponential in terms of the spend compared to just a year or 2 ago. But now we're just figuring out the right mix of what model to use for what team, for what use case and that gives us confidence that we'll be able to be in the right place when it comes to the amount of spend in totality, both for internal usage and for building external product and for customer customers as they use those external products that will be in a healthy place. But especially on the external side, we're still very much testing this in the EA phase.

Yes. No, that's really helpful. Just a follow-up. It's a little a little maybe a little bit more a one-off in a lot of ways, but there's so much demand that you constantly have been talking about. So this isn't like the only quarter. It's been several quarters now for some time. And I'm just wondering, like is the go-to-market motion for the team and like the sales force efficiency, are they running hot and to the point where you need more potentially out of them and there, therefore, you might need to expand? Or are you comfortable with the team you got on the field to get you to kind of the growth goals that you've provided to the Street, but at the same time, if you gave a little bit more, would you be able to throttle up that revenue growth and maybe art up as we go into '27?

Dan, I think we've got good coverage ratios where they come in. It's -- and also remember, as I talked about earlier, it's not just digital banking, it's relationship pricing, fraud, innovation studio, the AI products. I feel good about the coverage we have right now on -- based on the number of deals we're doing in coverage. But if we see -- and as you said, this has been multiple quarters and we continue to deliver. But more sales reps doesn't always solve the problem. It shrinks commission rates, the amounts of wins. And so I want to make sure as a salesperson myself, I want to make sure they can make as much money as they possibly can. But I don't see it as a situation where we're understaffed or under provisioned on the sales and go-to-market side, the success team and the sales team and the specialists and everybody involved do a great job.

I'm happy with what they're doing. They just got to keep it up and continue to make sure we keep winning.

And the next question is from Michael Infante with Morgan Stanley.

I wanted to piggyback on Parker's question earlier, mainly because if I carry forward that low 20s net new subs there are range from the first half throughout the balance of the year. I think I get subshare sort of exiting '26 at or above 8.70%, which is around sub 12% growth. So I guess the question is just given your reiteration of '27, like are you implicitly saying and/or expect that the back half from a net new perspective will accelerate? And how should we be thinking about the key drivers of that?

Well, I mean, when you look at the 2027 subs revenue growth guide of 12.5% to 13%, and you think about where we were in the first half of this year, which was a meaningful premium to that that actually implies a modest decel in the back half when it comes to those metrics. But again, we feel good about -- you've got to remember, in the Q3 and Q4 period, a, we have tougher comps than we faced, especially in the second quarter, but even all of the first half. But we also expect a higher mix of these larger Tier 1 and enterprise deals.

So we definitely think we're going to -- assuming we execute on the bookings front, that we're going to be in a good position vis-a-vis that '27 goal. And obviously, all hands on deck to meet or exceed that. But when we think about sort of where we were from a subs ARR perspective, call it, this time a year ago, you can kind of see the leading indicator is telling you what that means for subs growth here in the back half of '26. And we'll see where subs ARR comes in based on our bookings, to you're right, the incremental subs dollars that we deliver here in the Q3 and Q4 time frame.

But the baseline is going up, the law of large numbers is present, and so we got to execute at a higher and higher level as time goes on. And so that's why we go back to all of these other products we have, the cross-sell opportunity, the continued execution on the net new front because we sort of have to see that success on all those dimensions to continue seeing this business grow at the levels that we've talked about and higher. So hopefully, that answers your question, Michael, but let me know if there's any follow-up there.

No, it does, and it makes sense in relation to the slope of net new last year in the back half as well. Just a second one, you sort of alluded to it being early in terms of you internally sort of figuring out some of these optimization dynamics on the actual compute cost. But have you sort of learned anything incrementally as it relates to the gross margin profile of some of this ad delivered functionality? Do you expect it will be broadly in line with the aggregate business? Do you think it will potentially be accretive depending on what you're able to do internally from a model routing perspective in some of your internal sort of ML use cases? How are you sort of thinking about it early days?

Yes. I mean you framed up all of the work we're doing. It's a difficult question to answer today, not just because it's early adopter, but because it may vary wildly by product. And then the question then becomes what products scale up that ultimately become meaningful revenue contributors and then it may be accretive or dilutive to gross margin accordingly. So it's a pretty difficult question to answer right now given where we are on all 3 of them. I can tell you when it comes to all the AI usage internally and managing that not only optimizing for where it falls on the P&L between cost of goods sold and primarily R&D, but OpEx otherwise.

We're doing a lot of work there, and then we're being thoughtful around how do we make sure that we're using the right model and the right level of spend for the right use case because in the early days, there wasn't a lot of management around that admittedly. And so now as these numbers are getting larger and larger, making sure that we're being thoughtful about it and working with the teams around the ROI when we think about how much we spend to deliver a certain outcome, it's just a muscle we're building in real time, and that's going to be a big part of our journey here over the next for sure, 6 to 12 months.

And your next question comes from Chris Kennedy with William Blair.

Last quarter, you talked about a large fraud deal being larger than a digital bank customer win. Can you just provide a little bit more perspective on your relationship pricing business, the size of those types of contracts, especially as you have a lot of momentum today?

Yes. I mean, maybe use the example that was cited in the script when we think about that top 25 bank, that deal would look like a very large Tier 1 digital banking deal. I mean, obviously, that's a big institution. So it's a good example of one that should naturally be large. But like Matt said earlier, when you have 9 of the top 15 banks for that product, it skews to the enterprise banks and it skews to higher ASPs. So when you're asking about relationship pricing, obviously, it's a top-heavy product in terms of the customer base, but that also means from an ASP perspective that's going to be representative of a pretty large Tier 1 digital banking deal or larger.

Got it. And then now that the balance sheet is in a really good position. Can you just remind us of kind of capital allocation priorities and kind of build partner versus buy, especially with innovation studio partners.

Yes. I mean we feel great about the position we're in. Obviously, alongside this earnings call, we've announced the Board authorizing an incremental $350 million share repurchase program are on top of our existing programs. So we feel good that when it comes to that opportunity, we can be thoughtful and at the appropriate times, exercise that lever. And then at all other times, we now have, we think, the flexibility and the scale to continue to invest back in the business and you directly see that based on our '27 EBITDA targets. You can see the margin expansion is lighter than what we did in '24 and '25 and what we're now guiding to for full year '26.

So that's an example of us reinvesting back in the business to elongate this growth curve. And then when it comes to M&A, we think now with the debt paid off and the free cash flow generation, as you've seen, we haven't done deals and it's been over 5 years since we've done anything. So we're not going to do deals for the sake of doing deals, but we certainly have the capacity and the ability to be opportunistic now when the time comes. So long-winded answer, but the reality is it's all 3 of those things that we're going to be able to optimize for now going forward.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.

All right. Good morning, everyone. Thank you so much for being here today. I'm delighted to have Matt Flake, the CEO of Q2; and Jonathan Price, the CFO of Q2. Thank you both for being here.

Thank you.

Perfect. So I think I'll start off with some questions for Matt, then for Jonathan, and then a handful of others. So Matt, for you first, when Q2 wins against other leading providers for digital banking, what is the single most cited reason? And you said on the recent earnings call that win rates are holding steady and that average selling prices are up. What is driving the ASP improvement?

Yes. So I think on the winning side of things, it's really a formula of -- it's not one thing typically. It's -- the single platform drives a better user experience, operating efficiency. We can get them code faster. And then with AI and data, all on that single platform, we get a much better view of who the customer is. So there's a lot we can do with that with AI, plus we have -- we focus on customer experience and how we treat our customers. We always think about -- the customer has a customer of theirs on the other end. And so we're very responsive in customer support, and that's differentiated in this space.

Also, our experience in the space around whether it's commercial banking, fraud, retail, the 27, 28 years that a lot of people have been in this space building these products. We have deep domain knowledge on whether it's conversions, how other systems work, how you get off of them, how you help people utilize our products. So we kind of bring all of that to bear, and it pays off.

You want to cover ASPs?

Yes. I mean from an ASP perspective, a combination of the deal, the asset size of the average institution that we're selling to is getting larger. We've had a lot of discussion in the deals recently around Tier 1s and enterprise, and you're just seeing more volume upmarket. And then you're also seeing other product lines like our fraud product line win big deals that are akin to large digital banking deals. So the combination of those things is leading to a higher average ASP when you look at the portfolio overall.

Perfect. And you said a vast majority of banks and credit unions are still on legacy core processing systems for digital banking. And Matt, I believe you said in the past that we're in the beginning of the fourth inning. And you've also said that the top of the funnel activity has increased quite significantly in the first quarter. Is the replacement cycle actually accelerating? Or is it your share that's actually growing?

I think it may be a little bit of both. I don't like baseball analogies. I'm not a baseball guy. So maybe it's the NBA and it's the second quarter, and there could be 2 overtimes after that. But no, I think that what's happening is we're beginning to distance ourselves with our platform, our functionality, our customer referenceability. And so the deals that come up, like for instance, in the first quarter, we were -- we didn't lose a single Tier 1 deal we were competing in. We were at about 100%. I'm not saying that's going to be for the future every quarter, but we are winning.

ASPs are going up. Our customers are happy. We're continuing to innovate on the platform, and it's differentiating because a lot of these A lot of the customers we go after, the regional and community financial institutions are seeing a lot of opportunity in the business banking side of things because Bank of America, Wells, I'll leave one bank out. Citi have -- they're moving more upmarket and the small to midsized companies are looking for banking relationships where they can have somebody that's local, understands the economy, understands the business they're in. So they need products to be able to replace those systems, which are robust at those -- at the larger financial institutions. And we seem to have the one that does -- can help them gain those deposits and deepen the relationships with their customers.

Perfect. And maybe moving on to fraud. So one thing that's very impressive to me about Q2 is that you obviously have this large digital banking opportunity and the competitive market is quite consolidated. But fraud is emerging as this massive opportunity for you. It's relatively small in your existing business and somewhat opaque for investors at times. I believe you've described fraud is no longer episodic or confined to a single channel. It's continuous, cross-channel, embedded in nearly every digital transaction. Could you walk us through what the full fraud deployment looks like at a large FI and why fragmented point solutions don't work well anymore?

Yes. So the fraudsters are using technology and evolving and it's coming in every direction, whether it's a consumer or a small business, the bank, the network of the small business, the network of the consumer, the e-mail accounts, account takeover, all those things. And so there's really no vector that they won't go to if they can move money out, and they're sophisticated. And so the tools have to be sophisticated. To be clear, for us, we began building machine learning for fraud -- our fraud products in 2008. We began to hire people that use machine learning to look at the behaviors of people. So it's not new to us, but we have expanded that offering. And then we're really excited about our AI products that are coming out on fraud here very soon that are in early adopter stage right now.

And I think for a full deployment at a customer, you're looking at everything from check fraud to ACH fraud to account takeover to the network security to identifying the user logs in. It's just everything that we do. And so the value we have at the platform, especially when it's we're using our products and then integrating through innovation studio or APIs, other products is we have all of the data of the person, whether it's their behaviors, who they pay, when they pay, how much they pay, the Fed district.

If you think about a business, it's much like a consumer. You pay the same people about the same amount of money at the same time a month, whether it's employees or suppliers to you. And so we begin to use that data, we see where you log in from and determine who it is. And so the $1 of fraud costs $4 to $5 for the bank. And if you talk to a bank, if you have a provable solution that's going to stop fraud, I don't want to say they'll pay anything, but it's worth it to them because the money loss is only the beginning because after the fraud occurs, you've got to go deal with the customer, and it could be completely on the business' fault that it happens, but it doesn't usually play out that way when they talk to the financial institution. So it puts a financial institution in a bad case. So just stopping the fraud salvages the relationship. They'd rather pay the money to stop it than to have to go try to collect it again and deal with the customer.

So it's a huge opportunity for us. We continue to take advantage of it. I think we've announced big deals almost every quarter for the last 3 or 4 quarters on the fraud side, and I anticipate we'll continue to see some of that momentum.

Perfect. And I believe in the last 2 quarters, you've signed the largest ever fraud tech contracts within your existing FIs. Is it exactly that, that they are signing on to a larger suite of solutions? Or does it have to do more with the breadth and scale of their organizations?

Maybe a little bit of both. I think one of the things that happens, and we saw this play out in 2013 and '14 is when you start to get bigger customers, other big customers start to look at it. Nobody really wants to be your first $200 billion bank to use a product. And we have a lot of those customers that are expansion sales for us. A lot of them are existing customers. But as you begin to get it installed at a $100 billion bank, it's easier to do it at another $100 billion bank or a $50 billion bank or $150 billion.

But these products are utilized by all customers of all sizes because they all have this threat. So nobody is immune to it. So I think it's somewhat the maturity of the products, the data we can provide them on the success rates. And I think you'll -- that is what's driving a lot of this plus the expansion opportunities within the existing customers.

Perfect. And as AI makes code generation cheaper, how do you think about the value of your context orchestration, regulatory infrastructure and your 25 years of operating scale? I believe your CTO has said that if it takes 2 things to make a product and one just got a lot cheaper, the value of the other thing goes way up.

Yes. I think writing code is we believe it's going to be less expensive to do and faster and those other things, but there's a whole layer of work that goes in after the code is written. It's the delivery of it, the support of it and then converting people from one system to another system, educating people on how to use it, fixing things when they break. You have organizations around all that. You have a delivery organization, a hosting organization, a support organization and integration group that has to do that.

And so the software is just one piece, and we believe there's a lot of value in AI there, but we are also trying to use AI to make those other roles more efficient as well. But right now, it takes a lot of domain knowledge and experience to work in the regulatory framework we're in. We are examined by the FFIEC, OCC, FDIC and FRB. They come in and look at our systems. It's not a start-up friendly environment.

And so for instance, on AI now, what we learned over the last 2.5 years, we've been experimenting with it is you got to start with the compliance and regulatory group. And that's not usually where start-ups want to start or other people want to jump into a space. And then you got to explain the utilization where the data is, how you're securing it, who has access. And so all that is stuff that we've built those muscles, and I think it takes a long time to do that, and you have to have some domain expertise in that area. So we're bullish on AI, and we continue to think it's going to be an advantage for us.

Makes a lot of sense. And as a follow-up to that, as we know, the majority of your addressable market is on legacy technology and that tech is provided by core processors. There seems to be a fear among investors that Frontier AI providers will join forces with those core providers and offer an AI-enhanced digital banking solution. Why or why not do you think that's a credible threat?

Well, first of all, I'm excited to know that Anthropic can't do anything, that they can't do everything, that they have to partner with people. So there's a mission there that they need to go partner with people. I think if you look at FIS, they announced a deal with Anthropic for anti-money laundering and -- what was the other thing that they did?

Large financial crimes thing.

Large financial crimes things. So those are areas that we don't necessarily play in. That's mostly for really large financial institutions. But for me, I think it's exciting to see that they're reaching out to these areas that are vertical with deep regulatory frameworks to partner with people to go do that. And I think we are using those tools as well. It doesn't seem as if there's any exclusivity to them. I don't think that's how those OpenAI or Google or Anthropic are working. So to me, it just states the case that they're not going to go build these things on their own. And we have the access to the tools as well. So we are spending a lot of time figuring out what the next generation or what agentic banking looks like. And if you look at our track record, we're usually first to market on this stuff.

That makes a lot of sense. And the way I see it, that -- it seems at times the market is missing that you can't drop an AI layer in a bank and have it magically integrate with all the systems, and I believe you integrate with over 1,000 different providers. So do you think that's fair and something that also solidifies your advantage in an AI world?

Yes. I want to be careful. They tell me I'm not allowed to use word moats anymore with AI. But I think those are things that are hard and they take a lot of time to go build and experience in building them. And those are things you can't get wrong. You can't get somebody's balance wrong. You can't get a payment wrong. You can't get identifying somebody the wrong way. So it's going to be a while before you see that. And you -- and if you talk to our customers and prospects like we do, they are trying to sort it all out and they want to be thoughtful about it, and we're working with all the customers that we meet with about what is your strategy, what would you like for us to do?

And what they've come back with is we want to become more efficient. We want to be able to use your platform to be able to write things that are unique to us, and then we want to help with fraud. And if you look at our AI products, Q2 Code, Q2 Assistant and our UAM product, that's about account takeover. That's about helping their back office become more efficient. It's about allowing them to go innovate on the platform rapidly with a small group of deployed engineers or whoever they want to go do that. So that's the space we're going at, and that's where we're seeing a lot of interest from our customers. And so we're going to lean into that.

Perfect. And my next set of questions has to do with monetizing AI. So in particular, with Q2 Code, you've described Q2 Code as a discretely monetizable product SKU with a hybrid pricing model. So it's the subscription-based model that your customers know and love, plus credit-based overages for token usage. How are early adopter conversations going on pricing acceptance? And when do you expect enough data to set a scalable pricing model?

Yes. I mean the early conversations so far are good. I would say our financial institutions historically have not consumed from their major tech providers in anything, but the last many years in a subscription model and prior to that, license maintenance software. So I think what we're clearly going to have to do here is more of what I would call a crawl, walk, run approach where you have to create an analog for them that they measure their business on and price it along that dimension.

So take fraud as probably an easier example, whereas Q2 Code is trickier because the value to the FI may differ if their willingness to customize their own instance is lower than it is for, let's say, a larger institution or an institution with more technical aptitude. So fraud, I think, is an easier one.

Matt already laid the case out for what $1 of fraud costs the institution. So if you can deliver products and price them that have to do with the outcome that you drive with that product on that fraud dollar, I think it's much more clear, and we're seeing that already in these early discussions. So from a pricing and packaging perspective, I think it's going to depend on the product and the value prop as to our customers, the financial institution's willingness to move away from that historical pure subscription model.

And so as we talked about on the earnings call, I think at least on the fraud example, it seems to resonate at least with the early adopters that if you can bundle a credit that includes -- they don't care about our token costs. They don't care about our gross margins. All they care about is the value that we can deliver from these products. But if you can translate our infrastructure, our tokens and the value that we're delivering to a pricing scheme that they resonate with, then we think it can work. And so long-winded way of getting to, I feel like there's clarity on some of the products more than others. And we're going to have to figure it out because the underlying cost structure of these products to us is different.

What you can't do is price a product, let's say, Q2 Code at $5,000 a month and then just hope their utilization doesn't put you upside down. That's not a scalable way to grow a product or a business either. So it is a journey we're on from a timeline perspective for any of these products, to the extent they make it to GA, and we've talked about products in the past over the last 2.5 years that didn't make GA for a variety of reasons, including the customers' willingness to pay. We would expect that they would be there by the end of the year if they get there. And so -- and on the fraud side, we're pretty confident in the early signals.

And in Q2 Code and Q2 Assistant, I think they have a good chance as well. It's just there's more of a gate on who it's applicable to and when because of like an example I talked about where they may not have a small credit union, may not have a propensity to want to build on top of their instance and just take it out of the box. Q2 Code may not be relevant.

Perfect. And moving on to another topic that I think makes Q2 very, very differentiated. So you were the surviving platform in 93% of M&A transactions involving a Q2 customer in 2025. And you specifically called out the Synovus Pinnacle deal in the first quarter. You said you don't model hypothetical M&A into guidance and that most of the time, you would expect there to be upside from an M&A outcome. But with M&A activity continuing to pick up, how should investors think about the magnitude of that unmodeled tailwind?

Yes. I mean it is pretty tricky because first of all, there's different archetypes of a deal. So if you say a Q2 bank acquires another Q2 bank or credit union, you go from 2 platforms to 1. So you're actually out of the gate while strategically keeping the customer, growing the user base, the ability to cross-sell products and typically, the term of the deal elongates. Those are all positives. But on day one, you're actually starting from 2 platforms going to 1. So you actually have to fight to get a hundred cents on the dollar back to that and then grow your way beyond. So the economic impact of that actually going bigger than what is your A+B today may take some time. And so it's pretty tricky to know that other than strategically from an enterprise value perspective. That's a good thing when we win those deals.

A different archetype would be, let's say, a Q2 bank acquiring a non-Q2 bank. There, the economic opportunity is pretty clear and much sooner in the cycle because you're typically acquiring a target bank's customers and moving them to the system quickly. And you're still negotiating terms, you're opening up the contract in every one of these transactions. So I guess long-winded way of saying the opportunity is there in all of these. The key is that we're winning them, but then the opportunity and the timeline to monetization varies wildly based on the individual deals.

So I guess what I would look to is when we talk about, let's say, a Synovus Pinnacle or deals that are booked, that's when they hit ARR, subs ARR. And then when the migration occurs of the target bank onto the acquired bank is when the revenue flows. So the best indicator because you're right, we don't model the hypothetical M&A. Even though with a lot of our customers, they're reserving implementation slots months in advance for their hypothetical M&A journey. We don't know who they are. We don't know when they'll actually happen and sometimes they don't. So we're not building that into the forecast. So I think the best we can do is work with the known deals.

And then to the extent it's a deal where, again, there's not perfect data out there in the markets of whether they're a Q2 customer or not, but the different type of deal will dictate how soon they can have a revenue implication and what that might look like.

Yes, there is no great way to sort of model that the future M&A outcome. But the win rates are definitely a tailwind to the business. And if you think about -- we can talk about the levers that drove outperformance in subscription revenue in '24, '25 and Q1 of '26. The big ones are M&A execution, cross-sell and renewal execution. Those are the big ones.

Also, I'd say on a modeling perspective, there was a lot of momentum on M&A in '25, and it slowed down in the first 4 or 5 months of the year so far. So in modeling, it can be dangerous.

Q1 was 21 transactions in our customer base. We were on the right side of 20 of them, but that sample size is lower than many of the quarters of the last 6 quarters, meaning 21 deals.

Right. Very clear. And Jonathan, maybe moving on to some modeling questions. So you've raised the 2026 revenue guidance to $875 million to $882 million with subscription revenue growth of at least 14% and EBITDA margins of 27%. You've given an initial 2027 view of 12.5% to 13% subscription growth with, call it, 150 to 200 bps of margin expansion. Could you please walk us through the building blocks? How much is new logos, expansion, pricing, churn improvement, et cetera?

Yes. I mean from a '26 perspective, I mean, the nature of our model is such where the existing bookings that we booked through all of last year into Q1 largely gives us the visibility to guide to the revenue profile and the profitability profile for 2026. As we think through, we can look at any period, Q1 as an example, the mix of this business has been consistently shifting to more of it coming from, I'll just call it, expansion. Expansion could be selling digital banking -- retail digital banking to a commercial-only customer, commercial digital banking to a retail customer. One of the fraud deals was an existing digital banking customer, cross-selling other products, all the ones we've talked about today. So you have a much greater surface area of larger institutions with bigger wallets that we're selling more product into today.

So we have this discussion about the bookings mix or the revenue contribution in terms of incremental in the period, a couple of years ago, it would have been at least 50-50 from the net new side, if not well over 50-50. What we're starting to see now is a gradual shift towards more of the bookings and the revenue mix in an incremental nature in a period coming from expansion. And so I think that's what's characterized 2026 so far year-to-date. And I think you're going to continue to see that mix on the expansion side push above 50%. In any one period, especially in a quarter, it may look different than that. But over, let's say, a year or longer, we're starting to see that, and we continue to expect that will shift more and more towards expansion. I want to make sure I answered the rest of your question.

New logos expansion, pricing, churn improvement?

Yes, pricing and churn improvements. I mean, Matt already said, we talked about ASPs at the beginning. Churn, 2026 candidly, it doesn't have the noise that 2025 did. 2025 had one quarter early in the year, the second quarter that had some localized sort of again, total churn was on plan throughout the year, but there was localized churn in the second quarter that created some noise and seasonality. In 2026, both from a Q1 actual perspective and then the rest of the year, we don't see any lumpiness in the churn. We don't see any sort of term fee concentration from M&A, meaning nonstandard churn, but M&A-related churn. So we're trending ahead of plan there. We feel good about churn overall for the year and that for digital banking within it runs much lower than corporate churn. So yes, all on plan or better from that perspective.

And as a quick follow-up to that, going forward, do you expect to implement roughly the same amount of banks each year as you had in years past? Or is there any prospect of that potentially increasing?

Digital banking units are relatively predictable in a given segment. I mean at the end of the day, it's not just us that have these sort of 5-, 6-year contracts. Most of the industry operates on that. And so that dictates the cadence that these deals come up at. And then you typically have a time line that they'll go to RFP and then plan their implementation cycle. And so I think if our win rates continue to press up, our win rates are pretty good. Matt's talked about, certainly in the Tier 1 space when there's commercial, we're way above 50% win rates. On average, win rates are still at 50% across the portfolio. And so we're winning our fair share or better. And we're not seeing more units come up in a given period than we used to historically.

I think where you're going to see more volume where you've seen it already over the last few quarters is with these ancillary areas of the business that are becoming more strategic with fraud or innovation studio or PrecisionLender or what we call relationship pricing now, where those -- a, those businesses grow at a higher clip than the digital banking business, but there's often less friction in the sales. So we talked a lot about fraud already.

In the fraud products, a lot of them, our banks are reselling to their commercial customers. So they're always willing to buy more if they have a customer on the other side that they're, in most cases, mandating use it. So as they grow their commercial book, we grow our fraud products within that customer base. There's much less friction to that unit velocity than you see on digital banking, where there's a more fixed cadence.

And do you think cross-sell is a relatively new lever that Q2 is pushing? Or has this been part of the company's DNA for a longer time?

It's been part of the DNA forever. I mean...

Yes. I think we've always had -- our success team has a comp and is driven to drive more or paid to drive more cross-sell in the product. I think one of the things that's happened is if you look at the accumulation of Tier 1 financial institutions and the way that they buy things, if you're above $20 billion, you're usually buying retail or commercial or PrecisionLender separately and then you go make a separate decision. And then you get that up and running. If we treat them right, the product works, there's a logical reason to move to a single platform. So you have one administrative console. You have a lot of customers that are small commercial or consumer and commercial, so they get one log-in ID for that. And so what we're doing is really exploiting that as we have 100-plus customers in that area. So -- and I think 60% of them are -- or 30% of them are only running one of the major products. So we're really leaning into it.

We probably added more hunters to that because it's a pretty competitive sell. So we go in, our win rates are higher in that area, obviously, because the platform is already installed. So we're just refining it and getting better every year at it.

Perfect. And moving on to margins. You stepped up to 62% gross margins in the first quarter after completing the public cloud migration, and you've guided to 60% plus for the full year and -- excuse me, 60% for the full year and 65% plus by 2030. You said that there's a potential future step function in 2027 or 2028 as you optimize elasticity and cost in AWS. Can you give us a sense of the magnitude of the next leg? Are we thinking 100 bps, 200 bps or more?

It's a fair question, but we've been operating exclusively in the AWS environment now for just a few months, and we have an entire DevOps practice internally that is tasked with planning that outcome for what that could look like in '27, '28, but it's hard to know until you work in that environment. In the data center for the last 20-plus years, you're always solving for peak capacity, what the maximum utilization is. And so you never really have to worry about how do you manage the costs as utilization of the customer goes up and down.

You can't -- in our space, there's no -- like you can't afford to have downtime, you can afford to have issues and money movements, et cetera. So you're learning how the system works in AWS in this instance in real time. And so it's just going to take us time, we think, a year or so to then understand what is the incremental automation, tooling, understanding of how to manage the elasticity from an administrative perspective in AWS to know what the quantum of that upside is.

Clearly, we're comfortable that the long-term outlook of 65% is achievable, and that can come from other areas than cloud benefits, obviously. But we're going to find out here in the next year, and we feel like that is unlike a lot of the marginal uplift between here and 65%, which will come from things like subscription revenue mix continuing to press up above 85% will come from efficiencies in the COGS line items from things like AI and the benefits of AI. This one is unquantified yet, but we do think it's more of a step function to the tune of, let's say, 100-plus bps versus 10, 15 bps are the sort of sequential increases we'll see because of things like rev mix or marginal efficiency in the business.

Perfect. And if you had to name the top, call it, 2 to 3 conditions that would create the most meaningful upside versus your stated multiyear outlook, whether faster conversions, higher adjacency attach, better pricing, lower churn, AI monetization, what do you think that would be? And which is most likely?

I mean, for us, I mean, since Matt launched the 2026 like internal town hall was the term and we pushed all of the company, it was all in with the AI emphasis in terms of how we're going to change our operating rhythm as a company. The holy grail is accelerating top line through AI-driven products, whether they're AI native or AI value props where the value prop to the customer doesn't work in the absence of AI. That's the holy grail. So for us, that would be the one that would be top priority and the best possible outcome in this world of sorting winners and losers with regards to can you win with your customer in the age of AI. That's certainly the focus.

I think there's tons of cost opportunities when we think about efficiencies. I mean, obviously, we talked about it when we rolled out the long-term forecast, the 65-35 model does not contemplate a big uplift from efficiencies on the AI side, whether that's in support, delivery, engineering, sales and marketing, that's the model that assumes we're going to execute and manage our costs and the revenue profile according to the plan. And the ultimate outcome of reimagining how we deliver software, how we support our customers, how we go to market is not contemplated in that. So I think those are the 2 I'd call out.

And I'll let Matt jump in.

No, I think you hit them all.

Perfect. And this next point is particularly interesting to me in this AI moment where investors have the perception that competition is generally increasing across the board. But you noted recently that expansion deal length terms are actually increasing versus historical averages, which is a strong signal of long-term commitment. What's driving that? Is that customers locking in better pricing or the breadth of what they're buying? And does that change backlog or revenue recognition dynamics?

I mean you can take Q1 as an example, the average duration added in a renewal was more than 10% greater than Q1 of 2025. I mean we talk to our customers all the time, especially we've been really trying to pressure test for potential red flags that the software narrative is also the way that financial institutions are thinking about it. And anecdotally, that's definitely not the case, but they vote with their wallets. And when we look at how they're renewing in Q1 of '26, the fact that they are going longer duration, these are already 66-month contracts and renewals are often renewing with 2, 3 years left and then adding 30, 40, 50, 60 months to that.

If they were concerned about the start-up disintermediation or the Anthropic example you gave or their own ability to write code faster and disintermediate the vendor by doing it themselves, you probably wouldn't sign up for another 3, 5, 7, 10 years today in the second quarter of 2026. And when you match that with their anecdotal discussion that we're having about they need partners like us to go on their AI journey with them because, a, they're not technology vendors, but even if they can write code faster, they typically want to shift the indemnification to a third party. They don't want to operate the system. They don't want to manage fraud and account takeover and all that.

So even if they can theoretically write code faster even as nonengineers inside the bank, one of the big reasons they will lean on their technology vendors isn't just for the product, it's for the ability to offset or offload that risk to a third party. AI doesn't change that. So it doesn't mean that because we're seeing Q1, Q2 of '26, longer durations in net new and renewals, really on the renewal side is what moves the backlog, to your point, it doesn't mean that's going to be that way in 3 years. It's just right now, I can tell you our customers are depending on us when it comes to their AI journey, and they're committing to us in terms of the deals they're signing here in '26.

And what is the attitude from your existing or prospective customers on AI? Are they all in? Or do they have some reluctance or hesitancy?

Well, you're talking about probably arguably the most conservative group of business people in the world or at least North America. So they are -- there's a range of early to -- we have some of the larger customers that have technologists in the bank that are wanting to use our tools to begin to drive some of their own innovation, maybe unique to them. They may have a certain segment of customers they're going after.

But largely, they are trying to figure out from -- one of the things we learned in '24 when we began to roll out an AI product was that we skipped the compliance and regulatory group. And we went through that and then we came through -- and then when we got further along, they jumped in and had a lot of questions. And so now we've kind of started with a lot of our customers were talking about how we are approaching this from a regulatory perspective, privacy.

And so we're educating them on this, and there's some very curious and interested customers around some of these things. Most of them are looking at driving call center down, cost down on it as opposed to more using it strategically to go drive products. But I think they're working with us.

And I think Jonathan's point on the extension of these contracts, banks are trying to sort out who the vendors they're going to get there. And I think we tell our AI story and they say, I don't know if they're going to do it or not, but mathematically, they have -- or statistically, they have delivered innovation for years and years and years, and we can show it in the road map as opposed to some of the other players in the space have been a little more maintenance oriented. And so I think they're making bets that they think we're going to be one of the winners in this, and that shows up in the contract extensions, the win rates because they may not be buying the products, but they are listening and learning from us.

And I think there's a huge opportunity for us to take advantage of that relationship, that trust, that incumbency we have with those customers to put products in play, and we're taking chances. Some have worked or some are beginning to work and some have failed. But if you're not failing, you're not trying.

Perfect. And on capital allocation, you have almost $400 million of liquidity. You have your 2026 converts maturing very soon, and you've already executed $102 million of your $150 million buyback. And at the same time, your free cash flow conversion has increased quite a bit, delivering 93% in 2025 against an original target of 70%. How do you think about share buybacks versus M&A in this moment?

Yes. I mean I think we're in a position where we have maximum optionality to do what's best for the shareholders. And I think the Board has clearly signaled a willingness to participate and take advantage of low what we believe to be undervalued stock price to repurchase shares. The beauty, I think, of being debt-free is we have, a, all the markets available to us; but b, we have the capacity to go do things, whether it's investing in the business, incremental buybacks or M&A. But we don't have to go finance that -- prefinance that so -- and dictate the capital structure without knowing what that use of proceeds is.

So I think we're going to be open to and willing to continue to repurchase shares if they hang around these levels or we're at levels where we think it's undervalued. I think we want to continue to preserve optionality for strategic M&A if and when the right asset comes up. I mean I think the key here is M&A is not one big thing. It's what's the type of deal, what's the quality of the asset, how much are you paying? How does it strategically move the needle for us.

And the bar for M&A today is way higher than it was when we did the PrecisionLender deal 6 years ago, almost 7 years ago now or any of the big acquisitions because our open marketplace model gives us access to all the innovation. So they are going to be a really compelling reason why we need to own it, both from a valuation perspective, from a financials perspective and then also strategically because in our ecosystem, you have 2 problems with M&A that some of our peers are living right now is when you build that product through the channel, meaning us, Alchemy, FIS Fiserv, Jack and one of the competitors buys the asset, the channel behaves differently after the deal. So the entire business that they built, you now have to have conviction that you can go operate it and scale it and execute the business case under a different paradigm where you don't have the benefit of folks like us in the case of, like, Mantle behaving like we did before Alchemy bought them. And that's true of any of these businesses. So you have to have a lot of conviction in your ability to execute.

And then the other side of it is our financial criteria is way different now in terms of our expectation of what we would want from an asset in terms of margin accretion, underlying unit economics, revenue growth. And so it's just a way higher bar now. So we're open to M&A. We think we're a great strategic acquirer in the space. We clearly have the balance sheet and the free cash flow now to do what makes sense, but we're not going to do M&A for M&A's sake.

Perfect. Matt and Jonathan, we're out of time, but any closing thoughts?

No, we're just excited about the opportunity ahead of us. We are all in on AI. And I think we're moving as fast and safely as possible. So we're excited about what's ahead of us. And we think with the pipeline where it is and our close rates, we think we're going to have a really strong back half of the year.

Perfect. Matt, Jonathan, thank you so much for joining us this morning.

Thank you.

Thank you all for joining. Bye.

Good afternoon. My name is Kevin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings First Quarter 2026 Financial Results Conference Call. [Operator Instructions]

I will now hand the conference over to Josh Yankovich, Investor Relations. Sir, please begin.

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, 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 first quarter of 2026 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 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 sharing our first 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 outlook for the remainder of the year.

Starting with the quarter. We delivered a strong start to 2026 with financial performance that reflects continued execution across our key priorities. In the first quarter, we generated revenue of $216.5 million, representing 14% year-over-year growth. We also delivered adjusted EBITDA of $60 million or 27.7% of revenue and generated free cash flow of $44.2 million. Overall, we're pleased with our performance to start the year, including continued strength in our subscription model, ongoing demand for the mission-critical solutions we deliver to our customers and meaningful progress in our AI journey, which I will provide more detail on momentarily.

Starting with sales. We had a strong quarter of bookings activity to start the year, building on the momentum we carried out of 2025 with a record bookings performance for our first quarter. Our performance was highlighted by 9 total Tier 1 and enterprise wins across the portfolio. And as we've seen in recent quarters, our bookings execution continued to be characterized by a balanced mix of net new and expansion activity as well. We saw particularly strong performance in both our Digital Banking and our Risk and Fraud solutions.

I want to highlight a few deals from the quarter that exemplify some of the themes that have defined our recent sales performance. First, we closed a significant digital banking expansion driven by an M&A transaction involving existing digital banking customer, Synovus, who merged with Pinnacle Financial Partners. Following the merger, the combined institution selected Q2 as the go-forward platform for commercial digital banking and commercial fraud management solutions. We continue to view bank sector M&A as an opportunity for our business and an area where our platform strategy differentiates us. In scenarios like these, customers are making long-term strategic decisions, and we're proud to be selected as a platform of choice in a highly competitive and complex environment.

Second, we also signed the largest fraud deal in our company's history in the quarter. This was a win with a new enterprise customer and represents another example of the growing scale and importance of fraud solutions within our portfolio. As we've discussed in recent quarters, the cost and complexity of fraud continues to increase across financial institutions. What we're seeing now is that fraud is no longer episodic or confined to a single channel. It's becoming a continuous enterprise-wide challenge and one that is driving increasing levels of investment from our customers. This deal is particularly notable because of its size, and it marks another quarter where we've delivered a fraud booking of magnitude, reinforcing both the strength of our solutions and the urgency of this problem for our customers.

So from a sales perspective, we were very pleased with the breadth and quality of our bookings performance in the quarter. We're seeing continued demand across our platform, strong engagement from both new and existing customers and increasing alignment between our product portfolio and the strategic priorities of financial institutions. Of note, we're also seeing the term length of expansion deals increase compared to historical averages, which we view as a signal of our customers' long-term commitment to us as the partner of choice as they navigate their AI and digital transformations.

On AI, we announced 2 product sets in recent weeks, and I want to update you on our strategy and where we're executing. As we've discussed on prior calls, there are 3 key differentiators we see for Q2 in the current wave of AI innovation, data, distribution and incumbency and trust. As AI lowers the cost of generating insights and writing code, we believe the value shifts towards platforms that can apply those insights in a trusted, compliant and operationally sound way. That's where we believe the platform we've been building gives us a real advantage.

First, on data. Last quarter, I described Q2 as the system of context for our customers. While the core processor is the transactional system of record, Q2 sits in the flow of every digital interaction, seeing every log-in, transaction, alert, message and user decision. That gives us the context of behavior, not just ledger entries. We see log-in patterns, navigation paths, hesitations, retries and the full path a commercial payment takes from initiation through approval to execution. We believe that's the kind of banking-specific context AI needs to be useful, and it's a meaningful differentiator for us.

Second, on distribution. We have an established customer and partner network ready to consume AI as we deliver it. That network took more than 2 decades to build and operate at scale, and it matters because AI is only valuable as the places it can actually be deployed.

Lastly, on incumbency and trust, our customers are coming to us for direction on AI because of the trust we've built with them over many years. And because AI and banking has to be highly secure and compliant from day 1, we have the infrastructure, the technical know-how and the long-term customer relationships needed to deliver bank-grade AI at scale. Our customers are eager to adopt AI, but we have also seen an increase in customer conversations around the importance of managing data, privacy and access. Customers are turning to Q2 to help them work through this transition. And we believe that choice is continuing to show up in our bookings results as they make long-term strategic commitments to Q2 as their AI and digital transformation partner.

Importantly, we are already converting those strategic advantages into tangible outcomes and innovation for our customers. Our near-term product focus is in 3 areas: improving efficiency for bankers, strengthening fraud detection and prevention, and driving deeper personalization for account holders. We announced 2 new products in those areas over the last few weeks. The first is Q2 Code, our AI-assisted development capability, which improves efficiency. It embeds AI directly into the development experience, allowing customers and partners to build on our platform using natural language while leveraging the full power of our SDK.

The second is a new set of AI-driven fraud capabilities focused on account takeover. We're using AI to continuously monitor user activity, identify signs of compromise and intervene in real time. That shifts fraud management from after-the-fact detection to real-time prevention inside the platform where the transaction is happening.

Looking ahead, AI is moving toward more agentic models where systems take action on behalf of users. In financial services, that will require trust, transparency and control. The platforms that win will combine context, execution and compliance. We believe that Q2 is uniquely positioned to be one of them and that we can capitalize on the value this creates for our customers.

When you combine the progress we're making on our AI journey with our continued sales momentum, we're pleased with our start to the year. We believe that our sustained bookings performance, particularly coming off a strong second half of 2025, suggests that the demand environment remains healthy. And even with the continued sales execution, our pipeline is strong, giving us confidence in our ability to continue executing in 2026.

With that, I'll hand the call over to Jonathan to walk through our financial results in more detail and provide our outlook for the remainder of the year.

Thanks, Matt. We're pleased to announce first quarter revenue in line with the high end of our guidance and adjusted EBITDA meaningfully above. We also delivered record results across revenue, gross margin and adjusted EBITDA. The strategic investments we've made over the past several years helped to drive our best ever first quarter bookings performance and reinforces our confidence in the durability of this model. With that, let me start by discussing our financial results in more detail, and I'll finish with our updated second quarter and full year 2026 guidance.

Total revenue for the first quarter was $216.5 million, an increase of 14% year-over-year and 4% sequentially. Our revenue growth was driven by subscription-based revenues, which grew 17% year-over-year and 5% sequentially, resulting largely from the delivery of new customer go-lives and expansion with existing customers.

Subscription revenue as a percentage of total revenue continued to increase, ending the quarter at 83%, highlighting the ongoing shift in our revenue mix towards this higher-margin revenue stream. Total non-subscription revenues increased by 3% year-over-year, driven by a 12% increase in services and other revenue, which benefited from higher professional services revenues, primarily related to core conversions as well as an easier comparison versus the prior year. These increases helped offset ongoing declines in more discretionary professional services offerings, which remain under pressure.

Total annualized recurring revenue or total ARR grew to $945 million, up 12% year-over-year from $847 million at the end of the first quarter of 2025. Our subscription ARR grew to $802 million, up 14% from $702 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 expansion with existing customers. Our total ARR growth remains below subscription ARR growth, driven by the trends we previously discussed related to nonsubscription-based revenue.

Our ending backlog of $2.7 billion increased by $46 million sequentially or 2% and $444 million year-over-year, representing 19% growth. The year-over-year and sequential increases were supported by booking success across new, expansion and renewal activity. As we have mentioned previously, the sequential change in backlog may fluctuate quarter-to-quarter based on the renewal opportunities available within that quarter.

Gross margin was 62.1% for the first quarter, up meaningfully from 57.9% in the prior year period and 58.6% in the previous quarter. Both the year-over-year and sequential increase in gross margin were primarily driven by the completion of our cloud migration in January as well as an increasing mix of higher-margin subscription-based revenue.

Total operating expenses for the first quarter was $81.7 million or 37.7% of revenue compared to $77.2 million or 40.7% of revenue in the first quarter of 2025 and $78.9 million or 37.9% of revenue in the previous quarter. The year-over-year improvement in operating expenses as a percent of revenue reflects scaling primarily within sales and marketing and G&A.

Total adjusted EBITDA was a record $60 million in the first quarter, up 47% from $40.7 million in the prior year period and up 17% from $51.2 million in the previous quarter. Adjusted EBITDA margin was 27.7%, expanding approximately 630 basis points from 21.5% in the prior year quarter and up approximately 310 basis points from 24.6% compared to the fourth quarter. The year-over-year and sequential improvement was driven by a combination of the completion of our cloud migration and revenue growth.

We ended the quarter with cash, cash equivalents and investments of $379 million, down from $433 million at the end of the previous quarter, driven by the repurchase of $97 million of our stock in the open market in the quarter, for a total of $102 million repurchased to date against our $150 million authorization announced in November of 2025. We generated cash flow from operations of $56 million in the first quarter, driven by timing of annual invoicing, collections and overall profitability and delivered $44 million of free cash flow.

Let me finish by sharing our second quarter and full year 2026 guidance. We forecast second quarter revenue in the range of $214 million to $218 million and full year 2026 revenue in the range of $875 million to $882 million, representing year-over-year growth of approximately 10% to 11%. We continue to expect subscription revenue growth of at least 14% for full year 2026. We forecast second quarter adjusted EBITDA in the range of $57.5 million to $60.5 million and full year 2026 adjusted EBITDA in the range of $237 million to $242 million, representing approximately 27% of revenue.

In summary, we delivered strong results to start the year, finishing at the high end of our revenue guidance while also driving significant profitability expansion above 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 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 quarter into perspective. We're pleased with our performance in the first quarter, which reflects a strong start to the year across both financial results and bookings execution. We're seeing continued demand across our major product areas, including Digital Banking and Risk and Fraud, and that demand is showing up in both new customers wins and meaningful expansion with our existing base.

As we highlighted earlier, expansion continues to be a defining characteristic of our business, and our customers are increasingly choosing to deepen their partnerships with Q2 as they look to address some of their most important priorities. One of those priorities is AI, where we are continuing to execute against the strategy we outlined last quarter, embedding new capabilities like Q2 Code and our latest fraud innovations directly into the platform to deliver real measurable value for customers. As we look ahead, we do so with a strong pipeline, a durable business model and a clear strategy for continued execution. We remain confident in the demand environment and in our ability to deliver profitable growth while continuing to invest in the areas that matter most for our customers and our long-term success.

With that, operator, let's open the call for questions.

[Operator Instructions] Your first question comes from the line of Andrew Schmidt with KeyBanc Capital Markets.

Matt, Jonathan, Josh, great results here. It's good to see the top and bottom line execution. I wanted to ask a question just on the demand you're seeing. And I hear you on the strong pipeline bookings execution. But if we drill down a little bit and we look at the funnel, it just seems like we're hearing a lot more urgency out there in terms of tech investment, especially on the commercial side. And then also it seems like part of that is obviously AI driving it.

Are you seeing more opportunities in the funnel as a result of that? I'm just curious if you think about mid- and upper funnel, if the velocity or the volume has changed there?

Yes, Andrew, thanks. We are seeing -- we saw the top of the funnel increase quite significantly in the first quarter and the sense of urgency. I wouldn't characterize it as AI at this point, although we're having a lot of those conversations. I would characterize it as our banks are doing really well. Their stocks are doing well, and they're wanting to invest in technology to go get the -- have the technology to be able to go pick up the businesses and consumers in their communities that they work in.

And as I talked to a customer the other day, it's going live in a month, he just -- he said to me, I can't tell you how excited I am to get this product up and running so I can go take some of these bigger customers in our geographies because I'll have the tech to go do it. And I think that's really proud when I hear that, but that's really what the opportunity for them is right now is to go pick up these commercial accounts with this platform and all the feature functionality we have around the commercial functionality as well as the retail piece when they get off those old legacy systems.

So it's -- the demand environment, if you look at Q3, Q4 and Q1, it's it certainly is strong. And if I look at the second quarter and the back half, it looks good as well. So top of the funnel looks good and the opportunities look good for us, and we're doing really well out there.

That's awesome, Matt. That's great to hear. If I could ask a question just on AI and clearly, good job rolling out the AI products. But if we think about the pipeline of products, what things can we think about? There's obviously Agentic orchestration, there's MCP, threat access. I'm just curious, do you think you have everything in the portfolio you need to kind of serve future demand in that respect? You need to sort of emphasize different areas that might be below the watermark?

Yes. I think it's so early. We have a long ways to go, and we spent a lot of time with customers and prospects talking about AI and how they think about it. The one thing that in this industry, I think it's important to understand is the diligence around regulatory compliance and security is a significant lift. You got to go through all how you're using it, the security around it, entitlements, rights, all those things. And so right now, I would say most of the customers are looking for AI tools that can help them run the bank as opposed to change the bank. Our Q2 Assistant, Q2 Code are in those areas. And then also fraud is a big part of that. And that's obviously where our road map has played out.

But personalization, cross-selling products, understanding customers and what their next needs are, are definitely part of the road map we're going to begin to attack. But we want to get these right, and we want to get them in their hands and we want to get them happy with it, and we want to distribute and then continue to build on it. But there's a lot of opportunity, and it's early, and we feel like we've got some first-mover advantages.

And your next question comes from the line of Ella Smith with JPMorgan.

So first, many of your customers might be fraud tech customers, but not digital banking customers or vice versa. What are the benefits for customers if they use Q2 for both digital banking and fraud tech? And how well do customers understand those benefits?

Yes. So it's a good question, Ella. The value of combining the platform when you're using our digital banking system and you couple it with our fraud products, some of those products were built natively on the platform and others, we've partnered with people and then we built them separately is the data that you get is -- you get the payments, who's logged in, how they logged in, who they pay, when they pay, the Fed districts they pay in. We get all of that information in a real-time way when you're using the platform as opposed to if you're using a separate digital banking system. We may not have that information, it may not be as clean. It may not be as formatted the way we like it. So there's a lot more work when you're using a different digital banking system than a different fraud system. And so the value of putting it together makes you a more secure bank.

And so if you look at it, I think 30%, 35% of our digital banking customers use our fraud products. And even the 30% and 35% that are using the fraud products, there's additional products we can add to them. So there's a huge cross-sell opportunity there. And the stand-alone fraud product customers, we are actively using sales reps to go call them and talk to them about exactly the value that I just mentioned in why they should look at our digital banking platform. So it's -- there's a lot of synergies there, and we continue to leverage them in conversations and marketing.

Very clear, Matt. And for a follow-up, do you think in the coming years that digital banking implementation could happen faster either from technology development or your own efficiency? Or do you expect the implementation process to remain fairly long and intensive?

Well, I've always said that it takes 9 months to make a baby and it takes 12 months to deliver digital banking. So I think that may not be a truth in a couple of years. But right now, what I think we're looking for is to make our teams more efficient to where maybe a delivery team can handle 3 projects at one time now where they can handle 4 or 5.

The banks have a buying pattern and a project management approach, which usually revolves around a year before the contracts up, they begin going through an RFP process. They make a decision a year out from the go-live and then the project is kind of forced into that time frame so that they can get off of this other system and get on our system at the same time, so there's not duplicate paying in months. That's largely in the bottom of Tier 1 and Tier 2 and Tier 3.

But I do think we will become more efficient. It will be -- hopefully, there will be less work involved in it, not only for us, but for the bank as we begin to use tools that make it easier for the bank to do these conversions. But speeding them up, I think it's going to take a little time for us to have proof points around going and finding prospects that say they want to do it fast and we do it and we do it safe and it's -- they're able to -- a lot of these people do a digital banking conversion, and they got to do their day job at the same time. So I wouldn't pencil in speeding up the delivery process in the next year or 2, but I do think you're going to begin to see more efficiencies out of us.

And your next question comes from Terry Tillman with Truist.

Hi there Matt, Jonathan and Josh. Can you all hear me okay?

Loud and clear, Terry.

Awesome. So first, really intriguing to hear about this enterprise bank, largest fraud deal ever. I'm curious if -- how that kind of stacks up with just a traditional maybe digital banking deal. And is this kind of more of the exception? Or are you going to see more potential enterprise banks going big with fraud? And then I had a follow-up.

Yes, Terry, it's Jonathan. From a dollar perspective in terms of the ASP, this would be akin to a Tier 1 digital banking deal, if not bigger. It is a really sizable opportunity. And yes, there are more of those in the pipeline. And whether you're talking about the size of the institution or the size of the deal, both exist where we have deal opportunities that are this size, sometimes even with smaller institutions. But also, as you know, with the fraud product, we are targeting our entire customer opportunity, both down market and upmarket. So those are bigger deals. They have longer sales cycle, but we certainly see those opportunities out there. And wins like these, once they're live and become referenceable, just become arrows in the quiver for the sales team.

Sorry, I'm learning the technology here. I could use an agent maybe to help me. But Matt, you talked about efficiency, fraud and personalization customer engagement. To me, with all the contextual data you all have, all that digital exhaust, it does seem pretty substantial in terms of that personalization and customer engagement. I don't know how much of this would be through Innovation Studio partners versus organic. But when do you actually see that potential unlock? Again, I know this stuff with AI and agents is early, but it does seem like that's to change the business type opportunity. And what do you think of timing on that?

That's a tricky question, Terry. I'd like to get a couple more quarters before I get ahead of myself on that, the timing perspective. I think what's important is to know that we're working on it. We're talking with customers about it. I just don't want to get ahead of myself. Hopefully, you can understand.

And your next question comes from Matt VanVliet with Cantor.

Curious on how much Innovation Studios, not only penetration within the existing customers, I think we've gotten to the point where basically everyone is using something. But are you finding deeper penetration, more use cases in there? And how much of that is influencing some of these larger deals for things like fraud, where you're just fully ingrained in their ecosystem and using their preferred platform is -- makes sense from both an effectiveness and a cost perspective for them?

Yes. Matt, I mean it's a little bit of all of that. We're seeing, like you said, the financial institution customer base is largely adopted, but they're very early in their adoption cycle of how many products are they consuming and then how penetrated are they with those products within the customer base. Those latter 2 points is where we've seen a lot of progress just in the last 2, 3 quarters. And so we're seeing really good penetration of these products where we're seeing FIs get more than one product live sometimes when they're going through implementation or sometimes as a cross-sell, they're buying multiple products and taking them live.

And then we have a lot of work and AI is helpful around the idea of end-user marketing and how we're actually pushing these products out to the customer base. So we're seeing it have an impact. And yes, you mentioned the fraud arena. That is one area where it is bolstering our value proposition around the fraud intelligence story. And the combination is sort of akin to what Matt talked about earlier. When you marry the data and the signals from our platform, our fraud products and the partner products, you get a better fraud outcome for the financial institution. And so that is really salable to the customer base.

Helpful. And then as you look at the Helix business, it seems as though while the regulatory environment in the financial services has remained relatively unchanged, the ability to build products is certainly being curtailed in terms of timing. Are you seeing more interest in your digital core products? Are you seeing any sort of [indiscernible] buys or alternative institutions looking to build something that is more nimble and can support maybe alternative use cases going forward? Has that picked up at all?

Yes. I mean where I think it's picked up is the use cases that revolve around the traditional FIs as opposed to the Helix business, which was largely built around the fintech and brands when the BaaS space was more in vogue and was growing faster. So for us, we think that's a real opportunity over the coming years to bring that Helix product closer to the financial institutions with use cases, especially around the retail banking space.

And so you're right. And within Q2, that's one of the teams that's being the most innovative and aggressive in terms of how we're structuring to build with AI and we think that's going to pay dividends in our ability to move quickly in that market and show the FIs a value prop that's different than what they've historically seen from the course.

And your next question comes from Alex Sklar with Raymond James.

Matt, on the Q2 Code announcement, can you just elaborate on what that incrementally unlocks relative to what's available in Innovation Studio today? And is that a solution you expect to monetize over time? Or is this kind of used as a competitive differentiator or something that can drive higher customer retention longer term?

Yes, it's separate from Innovation Studio. So it allows the financial institution to write code faster at a lower cost and experiment and personalize their experience in a simple, elegant way that we're seeing more engagement on that largely upmarket. There's some Tier 2s that are playing with it as well. But what it does is it allows them to really leverage -- they may have a product that's specific to them, maybe a credit union with a certain member base where they can roll out products that are specific to them where they don't have to rely on us or work with on our time frame. So it gives them a lot of freedom to do that. And they continue to leverage the platform. We get a deeper relationship with them and they do more and more. And so we're encouraged by the early adopters of it so far.

And just to add, that is a -- the products that we talk about, these new AI products, so in the case of Q2 Code, this is a discretely monetizable product SKU. So they shouldn't be confused with AI features built into an existing product. And so obviously, it's early. We're in the early adopter phase. We're working with these beta customers around pricing models and building an idea of what monetization and revenue models could look like in the long run, but this is discretely monetizable product.

Okay. Jonathan, maybe then a follow-up for you. Just on the gross margin beat, you've got a few months under your belt now running fully in the cloud. Was there any part of the Q1 upside that was onetime in nature? And then how are you thinking about that opportunity now to really press on further optimizing some of the existing cloud deployments as we think about subscription gross margin?

Yes. Thanks, Alex. Yes, we're really pleased with the outcome when it comes to the overall project. The teams did a phenomenal job completing the cloud migration project and finished on time. And obviously, from an expectation standpoint, we're ahead of it when it comes to the gross margin outcome in the quarter, and you see that sort of as you think through what we'll talk about and what we put in the press release for the rest of the year. But so no, that's not onetime in nature. That is the outcome of exiting the data centers and really operating now cleanly for almost the entire quarter in AWS. And so that is complete now. We feel good about that.

To the second part of your question, as we think about the next leg, once we have time to operate in this environment over the coming months and quarters, we do think as we get into '27 and '28, there's a potential future step function upwards when it comes to another gross margin opportunity as we optimize working in that environment, understand scalability, more automation, more tooling, understanding where we need to rebuild architecturally to get better scale in the cloud. And so that's all coming. It's hard to quantify, and I would not expect that to impact 2026.

But to your point about onetime, the step-up to the 62% level, that is where we expect gross margins to be for the remainder of 2026, right in that ballpark. And we will continue to work on the stuff I mentioned in terms of the '27 and '28 opportunity that comes with being in that environment.

And your next question comes from Parker Lane with Stifel.

Maybe to go back to Q2 Code. Matt, we've heard from other software companies about more forward deployed engineers and a lot of services folks involved in bespoke Agentic offerings. Do you envision a world where with Q2 Code, you have less reliance on that or less of a need to go in that direction? Or will there be instances in the future where some of that work is supported by you guys and a lot of it is in the IT departments and the hands of the customers themselves?

Yes. I think that's definitely a possibility that you see less services work from us and they're able to move faster and they get more deeply embedded in our platform by using those tools. So for me, it's definitely a good thing to get the higher-margin revenue and kind of get out of the services business, but we're still going to have a component of that for a while.

Got it. And then, Jonathan, maybe one for you. Can you remind us what the renewal cadence looks like for this year, if there's anything in particular we should be mindful of or things that have changed relative to when you first guided 2026?

Yes. I mean we -- as we think about the rest of the year, it looks pretty standard. I would say more of the renewal volume exists later in the year as we think about -- we had a pretty strong Q1. As we think about the last 3 quarters of the year, Q4 is definitely the most volume, but there are opportunities all throughout Q2 and Q3. So it's just a question of execution on those and making sure if there are other opportunities, we can execute on ones that may be outside that period.

But we feel good about -- we talked about at the beginning of the year. Really, we looked at it as a 2-year cohort because that's how we always talked about '24 and '25. And when we looked at '26 and '27 as we headed into this year, they were very comparable in size, both in terms of the number of opportunities and dollars in play. And so now that we're into '26, we had a good start with Q1. And as we think about the year, it's -- yes, it's a little bit heavier on the Q4 side, but there are real opportunities available within each of them.

And your next question comes from the line of Michael Infante with Morgan Stanley.

Just on subscription ARR, is there any color you can provide in terms of whether there were any notable churn impacts in the quarter? And if so, maybe how that compared to the more concentrated churn you saw in 2Q of '25? I'm just trying to understand the bridge between the strong bookings activity you're seeing, including on the fraud side and the path to subs ARR acceleration from here as the recent bookings begin to convert?

Yes. No, there really wasn't, Michael, when it comes to outsized churn activity in the first quarter, and we really don't see a quarter like that in 2026, like what we saw in Q2 of 2025. So no, the churn targets that we put out at the beginning of the year still hold true. We're doing everything we can to execute to beat those targets when it comes to both total churn and digital banking churn itself and feel good about where we're at so far through 3 months.

That's helpful. And then just a quick follow-up on the professional services side. Jonathan, you obviously called out the durability of the professional services revenue you highlighted related to the core conversions. Does that change your posture on the negative mid-single-digit non-subscription revenue growth for the full year?

No, it doesn't. It really does not because -- well, 2 things. Number one, as we talked about when 2025 was evolving, M&A activity started to pick up. And so unlike Q1, where we had a very favorable comp, we're seeing the same type of elevated M&A activity here in 2026, but Q1 was a very favorable comp. As we get into Q2, Q3 and Q4, you start to see that the services opportunities related to core conversions from M&A are comparable. And so you just don't see the growth relative to those quarters in 2025. So we are still convinced that you are going to see a different look of that services trajectory as we get through the rest of '26, in line with the original guide we gave.

Your next question comes from the line of Adam Hotchkiss with Goldman Sachs.

I guess to start, this is a bit of a follow-up to Parker's question, but just maybe take a step back and help us understand your holistic relationship with customers as it relates to AI. Are they generally going about their own strategies where there's a mix of wanting to build things in-house and use Q2 for other things? Or given their size, are they generally totally reliant on you for AI road map and strategy and you guys are leading and they're following? How does that look for you?

It's the latter. I haven't seen anybody taking their own AI initiative and doing it on their own. They're partnering with us, learning from us, and we're trying to learn the problems they want to solve and build products to solve them.

Okay. Super clear. Helpful. And then on the Q2 Code being monetizable, I know it's early, Jonathan. I don't want to hold you guys to anything, but just how are you holistically thinking about pricing? And what's been some of the customer feedback around that? And then on profitability, based on how that product is run, how should we think about how token costs, especially given token cost inflation in recent months could impact margins to the extent that begins to scale quickly?

Yes. Like you said, it's early, but we're having real conversations with these customers. And I think there is an understanding that we're going to have to have a hybrid model and an evolution in our pricing model on these products to account for what you talked about in terms of the underlying cost model.

What we're seeing on an early basis with some of these AI products is the concept of what we'll call is a credit, which includes underlying token utilization, but other infrastructure and the value prop that we're delivering through that product priced-in up to a certain cap of token usage. And then over time, if they exceed that, there would be incremental fees for the excess usage. So that's sort of where it sits today as sort of a vision and a target of what I'll just call a hybrid model because it's still a subscription fee with a lot of that value bundled in, in a base size. And then the excess comes from over that amount and then making sure that we have caps to ensure that we don't go upside down in the interim.

So -- but it's going to be a really iterative process, and we're going to learn from initial adoption and usage. And -- but early indications are there's an understanding that it does look different from a pricing perspective than what we typically have seen in our industry with just straight digital banking historically.

On the profitability side, again, we can put in some of those caps and those structures to protect us. But I think it's safe to assume that until we see this at scale, it's hard to imagine like traditional SaaS margins are going to look like that on these early AI products, at least until we figure out sort of an optimal way to scale that's also sort of acceptable to the customer. So long-winded answer there, but hopefully, that gives you a little bit of color. We're working through it, and we're excited by the opportunity, but there's a lot we don't know yet.

And your next question comes from Joe Vruwink with Baird.

Just to stay on Q2 Code, if something like this makes it easier, cheaper, faster to build the custom integrations and experiences, what extent do you think that maybe widens the addressable audience you typically go after? And I'm wondering, does it make the platform less intimidating, does faster time to value become a key selling point. So maybe those that have traditionally not thought about Q2 as their digital banking provider, maybe this widens the core demo a bit and they start becoming addressable?

Joe, the size of our customers range from sub-1 billion to $400 billion on digital banking. And so when we continue to work our way up on the enterprise plus side of things, I think it definitely -- it doesn't hurt on these -- on deals bigger than that to have those tools so they can build the products that they want because they usually have a broader set of products or make them more customizable to them. We'll have to see in the sales process, whether we -- whether that's a differentiator for us, and we'll obviously tell you if it is.

So I don't know the answer to that yet. We've got to continue to experiment with this. It's early, and we're excited about it, and the feedback has been extremely positive early on. So I think it's going to create more opportunities for us. It's just a matter of -- I'm not positive on way up market, how much that will do.

Yes. that's good and I appreciate it so early. Just on raising the full year revenue forecast by $4 million. You're also calling out some pretty big deals on fraud, and I think those fraud deals can activate more quickly. Are those starting to layer into kind of the 3Q, 4Q outlook? Is that the right time frame to think about the fraud deals you're winning right now?

I mean it can be. The big, big fraud deals can have implementation time lines that exceed 6 months. So that -- the one in particular, we talked about that could be tight in terms of any real impact in 2026. But I mean, yes, obviously, we are -- we roll through the beat and are raising on top of that. And there's lots of contributors to that. That goes beyond just the go-live time lines associated with nondigital banking products. I mean we've seen great success so far this year when it comes to, obviously, the net new side, we talked about on the call across both digital banking, fraud and other parts of the portfolio, strong renewals and then another good cross-sale quarter and Innovation Studio in particular, had a really, really strong quarter. And like you said, those go to revenue even faster. And so sort of a culmination of all of that has given us the confidence to raise the revenue guide beyond just the beat in the first quarter.

And your next question comes from the line of Cristopher Kennedy with William Blair.

Can you give us an update on kind of new sales activity within Tier 1 -- or Tier 2 and Tier 3 clients?

Yes. We had a really strong quarter in Tier 2 and Tier 3 and the pipeline, I think probably the second quarter is probably going to be dominated by the lower end of Tier 1 and Tier 2 and Tier 3s with the upper end of Tier 1 and enterprise picking up in the back half of the year. We've obviously closed a lot of Tier 1 deals over the last 3 quarters. So really good activity there. Win rates are holding steady. ASPs are up. It's -- we've got a lot of traction in the kind of the bread and butter of this business, which is banks and credit unions between $500 million and $10 billion.

Great. And then just going back to the gross margins. Is most of the uplift this year just eliminating the duplication of the costs? And then over time, you should get some nice scaling benefits? Or are we going to see that in 2026?

Well, certainly, Chris, the uplift in the first quarter was -- that was a big driver. That was what we were expecting in terms of the step-up between the timing and the execution, it was even more than we expected, obviously, given the full year commentary last quarter, about 60% plus is the target. So I feel really good about that.

There's also other contributors, though, to be clear. I mean if you think about revenue mix now above 83% subs, that's a big one. We think that's going to continue to move upwards throughout 2026. We have a lot of optimization around efficiencies and ongoing initiatives, obviously, pricing and renewal and packaging that we've been talking about for several quarters now that are all having an impact. And then like I mentioned earlier, when it comes to sort of the next leg of operating in the cloud and seeing another uplift from that specifically, that's more of an opportunity we see in '27 and '28.

And your next question comes from Dan Perlin with RBC Capital Markets.

Matt, I've got a question to start on -- it sounds like when banks are considering core conversions, and I don't mean by M&A, I mean like the proactive stuff that's happening out there. It sounds like they're coming to you guys early. It's not first in many instances. And it seems to me like this AI opportunity for you guys as that becomes a bigger part of their budgets only accelerates that.

So I guess there's 2 things. One is, what are you seeing in relation to core conversion activity and appetite in the market currently? And then secondly, can you just remind us how that benefits you guys? I feel like it creates a lot of opportunities, but I oftentimes forget all the incremental products that kind of can get attached and things get switched sometimes. So that would be helpful.

Yes, Dan, I'm not [ sure ] on that. I don't think I've seen an increase in the number of core conversions that are going on. I don't really know. I think one of the things that we provide and one of the reasons that people go with us is because they have the freedom to go with whatever core they want because we have all the integrations. We have a lot of them to all the ancillary systems, not just the general ledger. And so banks and credit unions, when they get to a certain size, want somebody that wakes up every day and thinks about a customer experience, speed, performance, simplicity, security in the user interface.

And they want to get some leverage on not just the core processors, but us so that they can have freedom to go if they switch out the digital banking, then they can later on switch the core out a lot easier than having to replace the front end and the back end. So for us, for years, it's been a driver of deals for us, which is they pay a little more to go with us, but then they have some leverage in the negotiations on the back end with the core providers. So -- but I don't know. I haven't seen a ton of change in the amount of core conversions that go on. That's Fiserv, FIS and Jack Henry share that every quarter, I guess. I don't know -- I would think.

It's a hot topic. Yes. Just a quick follow-up. So I'm trying to make sure I understand the go-to-market motion that you guys have with the introduction of like Q2 Code and others. Like I know it's fully ingrained throughout the organization, but is it the relationship managers that are leading with this? Do you have kind of a SWAT team that's bringing this to market so that all the clients are aware of this? Is it a client conferences? Anything on that would be helpful.

Yes, it's all that. I mean it starts with product marketing, identifying the marketing with the products, how they're differentiated, how they work and then the marketing team goes and takes that information and puts it in the market. We train our sales reps, net new and our success team, the relationship management team to understand the value of these and why it's differentiated and how we built it. And then it's incorporated in every sales pitch to our prospective customers and our strategic reviews with our quarterly or semiannual strategic reviews with all of our customers.

We have a client conference coming up at the beginning of June, where, obviously, we're going to talk a lot about these products. It's going to be really interesting. We're going to have 1,000 of our closest friends there sharing what our road map and our future is, which we're excited about. So we'll have a lot of feedback in the August call or whatever the call is the second quarter call to kind of give you the feedback we got from it. But it's all hands on deck, all in on talking AI.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.

Hello, and thank you all for joining us. I'm Josh Yankovich, Vice President of Investor Relations and FP&A at Q2. A brief note before we begin today's call. Some of the comments today may include forward-looking statements that are subject to risks, uncertainties and assumptions, which could change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual company results or outcomes could differ materially from these forward-looking statements. A description of risks, uncertainties and assumptions and other factors that could affect our financial results or outcomes is included in our SEC filings. Except as required by law, we do not undertake any responsibility to update these forward-looking statements.

All right. Today, I'm excited to host Adam Blue, our Chief Technology Officer; and Hima Mukkamala, our Chief Operating Officer. We've organized today's session as an AI-focused deep dive covering Q2's strategic position, how Adam and Hima think about AI as an opportunity and the technical and architectural advantages that differentiate us in financial services. This is a conversation we wanted to have for investors heading into earnings dedicated entirely to questions on AI.

So with that, let's go ahead and get started. So, Adam, we'll start with you. Every software company is being asked about what AI means for their business right now. I'd like to start with the opportunity side from a strategic perspective, what is the opportunity set that you see available to us at Q2?

Yes. I think the opportunity is fantastic. Throughout Q2's 20-year history, we have been a partner to banks and credit unions, when technology evolved and shifted to help them take advantage of that technology to be competitive within their base, in their market and with the largest money center banks.

So when you have a real technology shock like the availability of generative AI and all of the attendant changes that have come as a result over the last 2, 3, 4 years of everyone getting their heads around it, that actually increases our value to the financial institutions that we serve because we have built a platform and deploy it with them that deeply understands what they do every day to operate the digital channel and their bank generally. And that platform represents a substantial site of embedded value, deep understanding and context that we can now leverage using AI to go faster and do more and accelerate and amplify the things we've been literally talking about for years.

And so as an opportunity, I think it is 100% aligned with our existing business model. We're not really a SaaS provider that delivers a SaaS application that people sign up for and use and then can easily move to another application. We have some characteristics of our business that are very SaaS-led. But at the end of the day, we are operating a complex multi-tiered platform with a wide variety of crucial integration points in an Internet-facing completely open Wild West kind of environment, and we are helping banks and credit unions assemble that set of technology units in the face of market challenges to maximize how they go to market and how they compete. And so anything that arises from a technology perspective that raises the bar for everybody is really, really valuable to us.

I think it makes a lot of sense. Hima, anything you would add to that?

Yes. It is an exciting time what the technology is enabling us to do not only for us, but also for the customers. Like Adam described, context is the pillar, it's the advantage and AI is the amplifier. So that's the strategy that we use, that we continue to build on. Like, an example of it is we have announced a new product called Q2 Code. It lets bank developers build customization on top of the platform that is driven by using AI agents and AI assistant. So to do that, they have the context of their business, they have the context of how their rest of the application looks like, but then constrained within our security controls, our compliance, all of that infrastructure baked in to create this runtime that is secure.

So they're not starting from 0 with AI. This is a continuation of the journey they've been on. We are seeing this internally how our velocity is getting accelerated. When a customer comes to us and says we need to deploy some capability in 90 days, we can now say, yes, we can deliver that. We have Q2 Code. We have the infrastructure that's in place that's been there for a long time. So the organizations that rely on us, our customers, they can move fast. But more essentially, they can sit in compliance with the rest of the environment as they go through this shift cycle. So that's what we're building towards.

Great. I think a little bit later, we'll come back to some of the cool things that we're doing internally and dig into that. But Hima, maybe I'll start with you on another kind of question we get from investors a lot, which is maybe it's a good opportunity for us to talk through another theme, which is understanding where Q2 sits in the architecture of banking and why our position is advantageous. So maybe Hima, we'll start with you about the integration, orchestration layer and why that is important with the application of AI.

Yes. I think I want to continue on what Adam said, right, which is Q2's digital banking is not a thin layer that is just visualizing a bunch of core data, right? As he said, we sit in all the customer conversation, customer workflows that are happening within a digital banking. And we do this with a multi-tiered architecture, and that is where we sit, right? As Adam said, there's a lot of complexity in the cores, how they operate, what are the nuances to it.

So it's a rich integration layer that's needed to make that happen. But we need to orchestrate all the actions that the financial institutions or the end users take. And that orchestration is pretty complex in terms of wires, ACH and money movement as a good example of what it takes. And then finally, visualizing all of those. So the point I'm trying to make is we are not a thin veneer that is just taking a bunch of data and just showing that data without not having a context to it.

So an example of this is the bank will come to us and say, "Oh, we're thinking of changing our core system. And you would think, oh, why are they coming to us? Because they are not just thinking of the core system, but they're thinking of the whole infrastructure when they're thinking about the core. And what we get out of that is what we hear and what the customers are saying is, before we do anything with that changing the core, thinking about what is needed to change the core, we need to make sure this rich integration, orchestration context system is ready for it, right? And so that they're putting a lot of emphasis on this architecture, the system at the top because that's where the customers live.

So this digital layer has become like the key product. They're trying to protect first before they think of core migration. This is not a layer they're willing to change. They'll come to us and say, we want to change core. So how would you accommodate that versus coming at it digital changing versus core changing. So that's something which we hear a lot. And this is a continuation or a direct result of how much context and operational integration that Q2 is into this financial institutions operating model. So we are not just integrated into the core, we are a fundamental system that helps the financial institutions operate. We are embedded into how they think about risk, compliance. And yes, Adam, anything you would add?

Yes. I think your notion about system of context is really powerful here, Hima. The other thing I would point out is the digital channel is where the orchestration occurs. It's also effectively the system of orchestration. So when I log into digital banking, I'm going to see data from the core, data from the bill pay provider, data from Zelle, data from SavvyMoney to tell me what my credit score is. And then the digital banking layer also knows when I log in, what I do when I log in, what my preferences are, which accounts I like to see in what order, what my nicknames on those accounts are. None of these things are downstream in these other products.

And so the experiential data and the expressed preference data for the end user, whether it's retail, commercial, treasury, all of that is up at the digital channel. And so what digital banking looks like is comprised of this integration of data from -- in a typical implementation, 25 to 35 distinct sources. And then the orchestration of, okay, when I do a payment, say, I got to make sure that there's enough money in the source account. If it's a prefunded payment, I execute the transfer from this Q2 platform, make sure the funds are there when the payment clears from the Fed. I'm checking entitlements. I'm making sure that there are security check. All of these things interoperate in a way that is really, really valuable and very, very complex.

So there's an integration layer that provides that system under which we can bring that data together. There's a context layer that maps all of it in a reasonable way. And then there's an orchestration layer that really does what the end user wants without them having to know what's happening underneath. All of that plumbing is kind of invisible, which -- because we're very good at it. But the invisibility of that plumbing is where a lot of the value is. So our [indiscernible] architecture, I think, is more vertical inside the bank than a lot of people realize. And we're performing a lot more orchestration, a lot more context creation than is apparent probably from what you see in digital banking.

Great insight from both of you on that. And maybe we'll kind of segue that topic into another one that we have been hearing from investors around kind of a buy versus build dynamic. So a lot of questions from software investors is AI-assisted coding is making pushing out code easier than ever. How do we think about, like, our banks and our customers building things that we have built for them but doing it themselves internally. Adam, I'll start with you. Is that something that you're seeing? Or how do you think that will continue to play out over the future?

Yes. I think it's really interesting. Financial institutions like to build things, but they don't want to do the boring stuff. You know what I mean? Like if you had $6 million burning a hole in your pocket, you could probably go buy a really good condition used citation. But are you going to fly it? You're going to maintain the engines yourself? You do the telemetry? You can do your own air traffic control? You're going to put gas in it? And so owning the code that delivers that channel and taking care of it, maintaining it, extending it, adding capabilities, that is not fun times for anybody.

And so when I think about our customers and buy versus build, what I tell them all the time is, let us do all the boring stuff. Let us do the hard stuff. Let us do all the Cloudflare integrations to make sure that it's secure. Let us deal with your regulators and correct coding practices and all those pieces. Let us deal with SDLC and engineers and product managers and all that stuff. You take Q2 Code in the SDK, you just build the fun parts. And the SDK is so powerful because it sits on top of an abstraction of their core and the data from bill pay and the data from payments and the data from integrations and security data. So every line of code you write or better yet have the AI write for you, it represents 10 or 20 or 30 lines of code in the underlying API infrastructure.

So I guess a financial institution might wake up one day and say, let's just build our own digital banking channel. What I can tell you is, unless they're committed to putting together the level of talent you have in a Tier 1 digital banking organization, even if they do build it, they will be so far behind what the current state-of-the-art is by the time they finish the initial build, they will literally never catch up because we're going to start building features and extending the platform and extending the infrastructure at the accelerated velocity that AI enables. And so we are already hitting the ground running.

And frankly, when I talk to financial institutions, they're coming off of other platforms from other participants in the market where you have everything you wanted, you just had to build everything you needed, and they want the exact opposite. They don't want to have to build anything they need. They want to build only the small pieces that they want on top of an extensible platform. So I think the AI revolution, if you will, and Q2 Code let us lean more into, hey, you guys build the fun stuff that really addresses your use case in your market and let us build the other 95% of the application because that, I think, is where they want to land.

Hima, anything you'd add before we go to the next question?

Yes. I mean, Adam referred to this, right? Vibe coding, Agentic assistant coding, whatever you want to call it, that is where the market is headed, software as a space, but Vibe operating is not something people really think about or know what it takes to go build 24/7, something happens. Someone wakes up middle of the night, 2 a.m. That's what the structure and the operating model is what Q2 brings. The reason why this question of buy versus build comes because are we able to move fast enough to meet their needs from their customers? And that's where AI, that's where Q2 Code, that's where our SDK Innovation Studio, either us directly or through our partners are enabling them to move faster and do the real business value outcomes, fun stuff, as Adam said it, and leave the other things, we are moving fast in terms of how we're releasing products in the market, how we enable customers to build those customizations or new capabilities that reflects their business.

So that is where the whole notion of core versus context. We want the banks to focus on their core, which is running a bank and build the fun stuff on top of the platform, while we go leverage AI, expose AI, I think that's the key, right? Not only us leveraging it, but exposing it to them through the tools which we have so that they can build fast themselves on top of the platform.

That's great. And maybe that kind of dovetails into the next question I have with Hima, I'll start with you. When we talk to investors about the AI work underway, some of which we already shared publicly on some of our most recent earnings calls, what are some of the real tangible things that you're seeing out there today? And what are some of the advantages that you might see in the future going forward?

One of the most sort of big decisions we had to make was we don't have a separate AI team. To make AI successful for us as an organization, we did some early POCs. There's so much changing, but we made it a fundamental part of how we do our work today, right? And that has been a critical part of changing how an engineer thinks about it, a marketeer thinks about it or an implementation person thinks about it. And so that is forcing all of us to think and including me, I'm sure Adam does this, too, each of us are thinking what agents are we going to use to do what we need to do every day. More than 80% of our engineers use a spectrum of AI assisted to agent it to complete orchestration to build the software that they do every day.

And it's not just about writing code faster as we have folks like Adam and I and others who build software, there's a lot more after the software is written, which in terms of pull request reviews. That's what you do to merge the code and validation from a quality standpoint, ensuring that there are no vulnerabilities in the code, doing performance testing. All of these are important in how software gets written and shipped, right? People focus too much on how the code is written, right, in this day of age.

So concretely, we are using AI to shrink code review cycles. We are using AI to add unit testing and functional testing so that we find more issues before the customers find those issues. That helps us to ship product with fewer regressions and fewer problems. And the amount of optimization or the amount of efficiency that we are getting out of all of this. I don't think we have a single number today because it's still early in the stage. So we're still yet to arrive at that stable state, but every signal points to us getting a lot more out of that. We are not only using that internally. Adam and I talked about Q2 Code, which is a product that we ship to our end customers, developers and the banks or our partners can use to build on top of the platform. We built that using AI, right? AI tools being built using AI.

And so the other sort of big shift in how we think about it is if you heard about the 2-pizza teams. Now the teams are even much smaller because orchestrating the AI agents to write code all the way from thinking about requirements to writing the code to testing is done by half the size of the team. And so that is also a big shift of how we are thinking about removing these transfer of information in the old days versus an AI Pod approach to go deliver that product, right?

So a lot of exciting work happening both internally and how we are shipping these products. We are shipping code in production with Q2 Code and Q2 Assistant that we have early adopters. So it is not, like I said, proof of concepts. This is built into how we do work today and how we are shipping products. Adam, would you add anything?

Yes. Just one thing. So I had a chance to interact with a customer that had been using Q2 Assistant, which is our back office-facing agent that helps our customers use the back-office tools in our product. more efficiently. And they identified 3 or 4 tasks around responding to secure messages, around resetting passwords, around managing entitlements where they were seeing substantial, I mean, greater than 50% increases in the efficiency of performing the task. That is a substantial improvement. So we're very early with that. But the fascinating thing for me is people will try anything with that text box that you type to the agent in. And so the great thing is we're also finding out what they want to do, right, organically instead of them telling us by just watching.

So the dynamic of the interaction with the agent because people have different expectations than a traditional piece of software is really changing the way we do product management and product engineering in a way that's interesting. And I'm excited to see some of the outcome. And we know that if we can reduce the amount of time it takes to manage the platform, that's time that a financial institution can invest back into selling products, taking care of customers, securing their enterprise. That's clear value that we can get revenue for and that makes us more valuable to our customer.

Makes a ton of sense. And Adam, as we -- a lot of questions we get from investors around like what does the future state Agentic world look like where they're running workflows, making decisions, executing transactions. Where does Q2 sit in that deployment of Agentic workflows within banking? Do they sit above our platform? Are they through it? Does that distinction even matter? What are your thoughts on that?

Yes. I think it's early, but here's the way I see it shaking out. The fundamental problem to some extent, with an Agentic world is that you have to trust the agent in order to allow it to behave autonomously. And if you're not willing to give the agent some level of autonomy, the agent is not nearly as useful because you're just directing the task, right? I don't want to marionette where I have to grab the crossbar and pull the strings all the time. I want a homunculus where I give it a task and it goes up to perform the task and then it comes back and tells me that it's done.

So if you set aside old world literary analogies for a moment, when you think about this agentically, I want to consume the services of an agent from a place that I trust. and I trust my financial institution. And so given a choice in consuming Agentic technology around my finances with access to my bank account and my key financial data, it feels natural that an end user would strongly prefer to get one that sits behind the same guarantees that they get from their bank or credit union. And so when you talk about observability, explainability, repeatability and guarantee, LLM technology and AI, part of its value is that it is stochastic. It is nondeterministic. It's part of the charm of it. Part of his drawback is that it's stochastic and semi random.

And so I want to know who I'm going to call. I want to know where the building is full of people that will help me if the agent doesn't do what I need the agent to do. So I think our financial institutions have an extraordinary advantage in saying, why don't you let us bring Agentic technology to you behind a TrustedLogin in a secured location. Is this the way that the world will shake out? If I knew the answer to that, then I guess I retire and just prognosticate on things.

But it seems very reasonable that we can work with our financial institution and construct a message within the adoption of Agentic technology around finance is tied to the financial institution behind their login and associated with their brand and that trust. Because when I look at what's missing in all of this, whether it's with OpenClaw or Cursor or some of the other things, CloudBook, whatever they rename that thing to, it's trust, right? It's already difficult when you just go on the Internet to trust the images that you see, the text that's being written, the dialogue that happens.

And so I think for people to adopt Agentic technology and finance, it's very attractive for them to adopt it through their financial institution because it helps solve the trust issue in a substantive way. That's where we see things sitting today.

That's great. Hima, any thoughts from your end?

Yes. It is -- my perspective is agents are going to be so permeated throughout the organization. To Adam's point, how do you -- how do they operate? I think you have to start naming agents soon. How do they operate within these trusted environments, whether they are coding agents, whether they are CSR or customer service agents or whether they are fraud agents, all of those agents have to operate in a trusted environment, merging this nondeterministic way the LLMs operate and merging that to the guardrails we put on it.

And the guardrails we put on it are coming at major areas, right? That's where the context that we talked about. The context can come in through the workflows. The context can also come through how we deploy the LLMs. Maybe Adam can touch on it later. We add a lot of system context to what we want the LLMs to do when the agents are running, and it could be the coding agent or could be the CSR agent. We're adding a lot of determinism so that when the bank CIO says, "Let's hope it works" is not acceptable, right? We want to make sure it works and it works as expected through quality, through evals on validating that we need to ensure when we test it in our environment, it performs as it is expected.

So when these agents are deployed within a bank, it automatically gets all the security controls, the identity framework I talked about, all the compliance validation, transparency of decision-making, audit trails and the infrastructure that comes with it, right, the scale because what everyone -- a lot of folks forget is scale is a big part of how -- what we manage, right, with 27 million end users and growing every day, our infrastructure today scales. And then as agents are doing the work of some of the back office or agents are coming in to talk to the digital banking APIs like Adam talked about, it has to scale based on the load that's coming from these agents.

So all of this has to come in together from a technology standpoint that enables agents to run within the infrastructure around the infrastructure calling into our APIs or the digital banking or the fraud or the pricing APIs. The value is the bank's engineering team don't have to build any of this, right? That comes from the existing infrastructure, whether it's running through our latest incarnation in the cloud that we have finished over the last couple of years. But then the agent and the bank can focus on deciding what is the logic, what is the context that the agent should work on, what are the conditions that they want to put. And we do know that not all banks, financial institutions, credit unions want to operate with the same context, right?

So one of the things about it is it's not just one agent that has one shape, right? We've got to give the capability to these financial institutions to create the right agent that works for them, that is unique to their financial institutions operating controls. We handle everything underneath that definition of the right policies, the right context so that they can focus on their outcomes. And so we're pretty much taking what we've been doing and expanding that infrastructure to the Agentic layer. That's how I think about our role in deploying these -- how the financial institutions are deploying agents.

That's great insight from both of you. I want to shift gears a little bit and just talk about kind of Q2 as a player in financial services relative to other names that we see in the space. So Hima, I'll start with you on this one where a question that kind of comes up consistently is what keeps either a larger tech company or even a smaller one from entering this space and kind of displacing us or challenging our right to win? What gives us the right to continue to win and why might that be durable?

When someone says, why can't a small company, and I think I got this from Adam, why can't a small start-up do what rewrite digital banking? We can do the same. We do it all the time. When we think about new features, new products, when we have to redesign something, clear up the tech debt, we do that, right? We decide to rewrite the code or we redesign an existing code or fix it. What -- where that code runs, I think that is where I see the advantage. I'll give you an example of what happened 6 weeks back when a complete region in AWS failed.

And we were probably one of the very few enterprise software ISVs that AWS has that were able to be up and running because we do have very strong active, active multi-region architecture. That's an investment we make. That is an investment we continue to look at from an operational standpoint to ensure that when we are deploying software, when we are testing software, it works uniformly across multiple regions and it scales, right? That is something. It takes a lot of investment. It takes a lot of collaboration with our partners like Cloudflare and AWS so that those environments are scaling and protected.

In addition, over the last 25 years or so, we have been subjecting this environment to regulatory pressure, FFIEC testing, OCC, FDIC, any regulator that looks at our stack and goes through all the validation that we are complying with that, right? So that's something that not -- that doesn't happen in a matter of a day or a year or so, 25 years. We've been continuing to strengthen our posture and positioning and that infrastructure is what we offer compared to a nimble startup that is building the software.

As we talked about in the beginning of the conversation, building the software is probably 10% to 20% of what the end-to-end value is. It is the complete operational environment is what is hard to put up. Incident response, right? A lot of the organization within the engineering and the cloud team are on call 24/7, so that if something happens, we have broad enough coverage globally to ensure that any time of the day, night a problem happens, we are responding to it.

Adam, any thoughts from you?

Yes. I think about it sort of economically, right? If it takes 2 things to make a product and one of them just got a whole lot cheaper, it means the value of the other thing just went way up. So if you can generate code much less expensively, that's great. And if everyone can generate code much less expensively, then that means design, discretion, operations, observability, architecture, all those things are now more valuable because the other thing is substantially less scarce. Like I saw a Lakers game the other day. If you went and you dropped the hoops from 10 feet to 7 feet, I could dunk. That doesn't mean I can go out there and compete in pro basketball because the hoops just got dropped for everybody.

So there's a lot more to it than just generate 100 lines of code, generate 1,000 lines of code. There's even a lot more to it than the coding and the deployment or the construction of products. So I think it's fantastic, these AI changes. I'm kind of grateful that the AI revolution came for engineering and coding first because I think Q2 is really well poised to take advantage of it. I think that it's going to move to other parts of the business and other parts of the industry. But economically, as [indiscernible] that really are the transformation of information from one symbol set to another set become commoditized and automated, every other part of the process becomes more valuable.

And so the question is not like do you have access to this thing? Like we all get access to the tools. You just -- you download it, you pay for your tokens, you do your work. The question is, from a competitive perspective, do you have a culture? Do you have the hunger to actually continue to progress? Can you attract the kind of talent, some of which, frankly, is entry-level younger talent that can take advantage of these tools. That will be the difference. And then there's something -- and it's not real quantifiable, but I'm going to put it out here anyway. If you don't know what kind of company you are and what your value is and what your mission is, when you take away this thing that used to be very difficult and you make it easy, you don't -- you really don't know what kind of company you are.

I think the companies that have a good sense of what their value is, who their customers are, what the mission is, what the culture is, those are the ones that will come through the AI transition the most effectively because they have an embedded capability for continuous learning, continuous improvement and a cultural hunger for getting better. Lacking those things, I think AI is a tough thing for a company to adopt.

And maybe one final kind of follow-on from a competitive standpoint. As we think about some of the names that we've been competing with for the last 20 years and these kind of established banking infrastructure players, in an AI-driven world, how does Q2 look to stay ahead against them specifically?

Yes. So part of it is talent becomes more important. Taste and discretion become more important. And I don't need to name names, but go look at legacy infrastructure players. Go look at the big payments companies that are also in digital banking technology. Go look at some of the subscale entrants that are struggling to put together enough revenue to get some level of accretiveness in their growth path. They are all in a very challenged space, in my opinion. We have challenges as well. We have challenges culturally because we've got to get people to understand their value is not the thing that they used to do that the AI can do now, whatever it is, writing code, closing books, putting in journal entries, evaluating source code, doing code reviews, that wasn't really ever the real value of the job.

The value is their ownership of the end-to-end delivery of value to the customer. And as it gets easier to perform the [indiscernible] automatable tasks, their ability to be imaginative, their ability to think differently. I used to have the crutch when I didn't want to think very hard about how I would deliver a feature to a customer to say, "What's going to be really hard to code it that way?" So we're going to code it this other way. The customer would say, okay, well, that makes sense. Now coding things is not the challenge anymore, right? The challenge is how much can you imagine? How much discretion can you apply? How much domain expertise do you have about what the right way to solve a business problem is.

And so that's really exciting, but it's also kind of challenging because in the absence of the constraint, many of the ways that we limited ourselves in the way we drove the business and delivered value have gone away. The more of that we can tear down and the more of that we can pursue, it's very exciting. And so I was talking to our Chief Legal Counsel, right? And I said, during that time, I asked you how many of our contracts had language like this? And he said, I don't know, but some of them, and I don't know which ones. That's now a 12-minute prompt and probably a couple of thousand tokens, whatever, to solve that answer.

And so you can ask a question and get an answer more rapidly. You can get better data for better decision-making. And so we can strip away a lot of this ad hoc, rule of thumb kind of culturally embedded decisions, and we can replace them with real interrogation of data that previously would have been just too expensive to do. I think Q2 is in a better position to do that because of our culture and the way we interact with our customers than the legacy, the infrastructure incumbents. And I think to some extent, even if you look out at new market entrants, whether they be massive or tiny, their need to acquire the domain expertise around the space because banking is a simple business, I think hamstrings them to some extent. And I'm not saying they can't make progress. I'm just saying that the addition of AI to us means we can continue to outrun them.

Hima, any thoughts from your end?

No, I think to reiterate what Adam has said, it's something which -- I think the market is sort of changing so fast. It's hard for every financial institution to keep up with all the changes. They're looking for a partner who's enabling them to go solve that versus having to run with all the changes. And that's something which is the value we offer going back to the talent and the approach we have within the organization. And so that's something which we are enabling them and helping them. So, yes.

Yes. I think maybe that kind of brings me to my last question, too, which is from investors, we get talking about like the sectors and markets that we serve, specifically as a software company and they've been curious about this. So banks may have been viewed as being slower to adopt new technology in prior cycles and regulatory compliance, legal risk, board scrutiny, all the things that we've been talking about. Maybe Hima, I'll start with you. How do you actually move customers forward on that AI adoption? And what does SaaS actually mean to banks and credit unions?

I have an interesting perspective given I've been here 2.5 years and came in when we were kicking off the cloud transformation and the kind of conversations I would have in terms of a little bit of friction, a little bit of concern in terms of putting that particular financial institution in the cloud earlier than the others. And so it's interesting 2.5 years later, what I'm seeing in the market, it is very different. They're not resisting it. They're asking for it.

I'll give you an example. We are shipping a new fraud product called user activity monitoring. And it has -- it's based on a bunch of detectors that tell if the user who's claiming to be a valid user operating within digital banking and working with the financial institution, they come back and say, "hey, can you add this new detector that is using volume of a transaction, right? We may not have had it. And they're willing to work with us, knowing that we use ML and LLMs to go build those detectors to quickly add a detector for that particular signal and push it back to them, right? I wouldn't have had this conversation 2.5 years back when they would be worried about how we are able to do that.

And so with all my conversation, it should not -- it is no longer should we do AI, right? It is about how do we do this in a very safe, compliant and doesn't expose them -- the biggest things the financial institutions are worried about is exposing themselves to customer trust, customer experience and regulatory risk, right? At the end of the day, we want to make sure that customer experience, customer trust, along with the regulatory risk doesn't take a next level.

And so with those guardrails, they're saying, I want to move, what's the framework to move that. As we all are, Matt and our conversations are all about what are we doing with AI, how are we using AI to help our customers and their end customers solve better problems and how do we do that safely. I think the leadership, the CIOs, the business leaders, other banks and the financial institutions are also being asked the same questions by their leadership, by their Board. So I think the market is a little different right now given this is a big tectonic shift that's happening in the industry, right? It is like the Internet wave of the '90s where it's not optional. It is about I want to do it, how do I do this with a trusted partner who I'm comfortable with, who gives me that tools that continue to operate in the same environment.

And so they want to work with someone who understand all the risk constraints, who understand all the market requirements from our regulations, compliance and who knows how to scale infrastructure, right? That's something which is continues to be important in terms of what they're looking for versus don't make me the first user of AI, like Adam said, right, some of the early feedback that we're getting from our early adopters on the AI Q2 Assistant is incredible. They're seeing the value that comes from it.

And so I think they sort of slowly moving from the exploratory stage to now thinking about, okay, how can I get ahead of the other banks? That is one of the other things, other financial institutions, banks or credit unions. That's one of the things they are also realizing is how do I make this a competitive differentiation versus trying to use that as a defensive strategy. So that changes the conversation we are having because that puts a sort of a time constraint or urgency from a timing standpoint. We're going to do this. How can we do this in 90 days? That's the kind of conversations we're having with early adopters versus come back and talk to me in 2 years, right?

That's a fundamental shift I'm seeing because I think a lot of it is driven by their own work that they're doing outside of digital banking to leverage AI because AI is pretty permeating across every part of the organization, and they're seeing the value of it versus maybe cloud was a different story, right? And so that is sort of giving us that more aggressive partnership with these financial institutions to go deploy Agentic solutions in their back office, in their coding environments. And so I still think of this happening in different cohorts, like any other adoption curve, we are in the first 20%. I would have thought the first 20% would have been a longer time spectrum, but that is the difference that I'm seeing now, which is that first 20% wants to do it now, wants to do the number of early financial institutions signing up for early adopters is pretty high.

I wouldn't have expected this even 6 months back when we were thinking of these new products that are Agentic in nature, whether it's Q2 Assistant or our fraud products or Q2 Code. I have a feeling that next 60% as they start seeing their peers in other industries, and we do this a lot, right, because we have a large customer base. We're always talking to them in our QBR, CBRs, giving them updates on how their peers are doing in other markets. They're going to come pretty quickly and say, okay, I want to go deploy that. And that's something which will be a good problem to have for us because our passion comes from seeing a lot of these products being used a lot in the larger market.

And so I would segment the market as the first 20%, and then we'll go to the next 60%, and it will happen pretty quickly as early adopters succeed. But I feel like we are in the cusp of late early adopters, early next 60%. Adam, that's what I'm seeing. What are you seeing?

Yes. I'm getting questions through folks I talk to banks that are coming from their Board, like they said, my Board is wearing me out about what are we doing about AI? What are we doing about stablecoin? What are we doing about tokenized deposit? What are we doing about quantum computing? These are Board-level conversations now. 3, 5 years ago, the boards were not asking about technology topic. One of the advantages of the enormous hype cycle around AI has been -- that it provides you with air cover to talk about why it's important. It's in the news every single day. I mean it's an extraordinary part of the news cycle that has not moved or shifted.

And so we know that our banks and credit unions are generally on the acquiring side of merger and acquisition, partially because we have a great product, it makes it easy for them to do so and partially because we tend to win the customers that are more aggressive and they want to grow and they want to use technology to do it. But when somebody says to me, I was talking to a Board member and they want to know if you guys can provide us an MCP interface to the back end, so we can build our own AI tooling against your platform, that's not a conversation I anticipated in 2026. But I'm super excited that's happening because I love to work on those things and talk about that stuff.

So for 20 years, at least that I've been at Q2, this story has been about we can give you the technology that makes you competitive with the larger bank and whether they're a little bigger than you or way bigger than you. We can take away some of the disadvantages you feel like you have, so you can lean on your advantages about being in the community, being specialized, being in a niche. That has become more true and not less true. When the mobile phone came out, I thought it was one of the most fantastic things ever because I don't know if you noticed, but Bank of America and Bank of Waxahachie, they get the same screen size. They're the same on the mobile phone. There is no reason that the experience can't be as compelling. AI, I think, further accelerates that trend, right? There is no reason for a small financial institution, I'm talking about $2 billion, $5 billion, $10 billion, not to have the same level of technology as a $250 billion super regional or even approaching the same technology level as [ Chase ].

And I might argue, in a post-AI world, because of their size and some of their nimbleness, I think you could see some of these smaller financial institutions using technology to really carve back some market share from some of the largest banks or some of the big mid-tier banks because they can move faster because they're not hung up by committee and because they -- to some extent, they don't compete with each other nearly as much as they compete with the folks outside of our customer base. So it puts us in a really interesting position to be able to work with them on this stuff. And man, I'll tell you, they are hungry for it. We have -- I have conversations today on every one of these topics with a $2 billion bank in from East Texas. And so it's top of mind.

Awesome. Well, I appreciate both your time today, and I think investors and analysts are going to find this content really valuable. Before we close out, maybe I'll give you both one more chance to share any final thoughts that you have. And Hima, I'll start with you.

I want to leave with what Adam said, right? This is AI as a technology is enabling everyone to be a technologist. It's enabling everyone to move as fast as someone with a lot of investment. And our job at Q2 is to give -- help them move as fast as or even faster than the person sitting next to them or an institution that is even larger than them. I'm super excited about the journey that not only we are taking, but what we can enable our partners, customers. So it's great times to be here.

Yes. We're really privileged at Q2 to have the roster of customers we have who are so critical in building our business, in trusting us and in providing us with kind of a North Star for executing the mission. AI as an enabling factor to allow us to go faster for them, and it's just tremendously exciting. I tell people all the time, when I was 9 years old, if you'd ask me what I wanted to be when I grew up, I probably would not have said I'd like to be the CTO of roughly trending towards $1 billion revenue software company that works with banks to try and make community banking really great for everybody in the U.S.

And looking back on it now, I cannot imagine having chosen anything that would be more fulfilling. And so as each of these technology waves has come, the Internet, mobile, microservices, cloud, AI and AI probably is as big as all the rest of them combined. It's just an extraordinary opportunity to reinvent and rethink the way you apply understanding business problems, creating value through solving those business problems and then working with people that you actually care about to try and do something meaningful. And I think that resonates with us and our customer base. And I think that's where we get a lot of our loyalty, and it's where we get a lot of our forward momentum in the space.

Awesome. Well, with that, we'll go ahead and close it out. So once again, thank you both for the time. I really appreciate you both taking time today. Thanks.

Thanks, Josh.

Thanks, Josh. Thanks.

[ Audio Gap ]

And I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings Fourth Quarter and Full Year 2025 Financial Results Conference Call.

[Operator Instructions]

I will now hand the conference over to Josh Yankovich, Investor Relations. Sir, please begin.

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 initial 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 the 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 8 total Tier 1 and enterprise deals, notable wins included the Tier 1 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 the 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 upmarket throughout the year, with a total of 26 enterprise and Tier 1 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 bookings 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 the top 5 bank and the 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 stand-alone products helping new customers for Q2, and regularly showed up as our top cross-sell 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 derisk 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 upmarket 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 deepened relationships with existing customers. It's enabling faster product delivery, better economics and stronger engagement. And as new priorities like AI emerge in financial services, we believe Innovation Studio puts Q2, our partners and our customers in a 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. And 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 on greater -- 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 stand-alone risk and fraud solutions continue to be strong land-and-expand products for the business, including with some of the largest enterprise and Tier 1 institutions. Customers frequently adopt multiple fraud solutions over time and frog that 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 stand-alone 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 log in, 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 differentiate it from other solutions.

And 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 base and established ecosystem model opens a valuable distribution channel to other AI innovators looking to serve this market efficiently.

The combination of these factors is why we believe AI innovation within financial services will flow through Q2, not around us. And we believe we are well positioned to translate that into tangible outcomes for our business over time. We intend to continue to use AI to enhance existing products and build new ones more efficiently, unlocking new bookings and revenue potential over the long term.

We've also identified several important areas where we can help deliver value with AI to our customers, including fraud, personalization, back office, banker-facing operations and tasks across the Q2 portfolio. We have several products across these areas that are live or an early adopter stage today. Over time, we believe our product innovation can create monetization opportunities that we will continue to evaluate as part of our long-term operating model.

Next, we believe that in the near future, embedded AI capabilities will become integral to delivering digital banking. This is where we believe our platform approach and our deep integration set give us a competitive advantage. And today, we are building platform-level AI innovation like AI-assisted coding capabilities for developers on our platform and AI-enhanced Q2 support tools to even further improve the customer experience.

Lastly, we believe AI will play a meaningful role in providing operating efficiency back to our business over the long term. We're already using AI to improve how Q2 operates across core functions like support, delivery and engineering, improving efficiency and scalability that we believe can support long-term margin expansion, while making our teams faster, more skilled and more productive.

Let me now shift to what we're seeing in our pipeline as we head into 2026. We exited '25 with a very strong back half bookings performance. And at a macro level, fundamentals of our end market remain solid with improving credit quality, stable margins and reaccelerating M&A activities, all supporting a constructive demand environment as we enter 2026. And from a pipeline perspective, we continue to see healthy pipeline activity across both net new and expansion opportunities with particular strength in larger deals where our platform approach and product portfolio differentiate us. As was the case last year, we do expect Tier 1 and enterprise activity to be weighted toward the back half of the year. Overall, we feel great about our momentum and pipeline, and we're confident in our ability to continue executing in 2026 and beyond.

With that, I'll turn the call over to Jonathan to walk through our updated guidance and long-term outlook.

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 and represented 82% of total revenue. Based on the strength in subscription-based bookings we observed throughout 2025, we expect the mix of this high-margin revenue stream to continue increasing as a percentage of our overall revenue mix in 2026.

Total nonsubscription 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 nonsubscription-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 booking 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 was $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 continue 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 to $216.5 million and full year revenue in the range of $871 million to $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 to $55.5 million, and full year 2026 adjusted EBITDA in the range of $225 million to $230 million, representing approximately 26% of revenue for the full year.

We are now in the final year of the 3-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 to 400 basis points and free cash flow conversion greater than 70% of adjusted EBITDA. For that 3-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 3-year framework and reflect 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% and 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 5 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 and profitability and cash flow conversion.

As we enter 2026, we're raising our subscription revenue outlook for the year and providing a clear 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.

[Operator Instructions]

And our first question comes from Alex Sklar of Raymond James. .

Matt, first one for you. Just with some of the growing expectations around core modernization within your FI base over the next several years. Can you just talk about what you typically see in terms of demand for your own solutions when an FI decide to migrate its core to the cloud or switch core vendors. How often does that create and is that bad for you? And any change in terms of what you're seeing there in the pipeline related to those opportunities?

Yes. Thanks, Alex. Any time a bank or credit union decided to make a change to their technology, whether it's in the core area, in particular, it opens up an opportunity for us, and we are expecting to get some opportunities from that. I consider it found money. I haven't had -- I don't have it built into the numbers this year. But I think we're well positioned to get a lot of at bats for those that happen. I don't know the timing on on those. And there's some natural conversions that happen every year.

But as you know, there's some -- some of the core providers are forcing conversion. So it should create some opportunity. It's just hard to quantify it, but I like how we're positioned, and I think it should create opportunities for us.

Great. And then, Jonathan, maybe one for you. I appreciate the early view is already giving a little bit of an above 2027 subscription growth outlook. Can you help us understand the right way to think about your underlying visibility into that subscription growth? Is it just on the strength in the strong Q4 bookings, is anything embedded in terms of what you need to go get still in 2026? And maybe where could there still be areas of upside to that early outlook? .

Yes. Thanks, Alex. We feel good about the early look into '27 and the range we provided. I think you should definitely look to the first half of '26 bookings execution is having an impact potentially on '27 that could drive upside to that. But we feel good about what we're putting out there based on the strength of not just the fourth quarter, but all of 2025. When you look at the mix of deals in the year, especially in the back half, Matt talked about just how much we skew towards larger deals in the back half. And because of the time to revenue on those larger deals, the full brunt of those that will hit revenue really give us visibility into 2027 from that perspective.

So we're very comfortable with the range we provided. And I would just look to -- once you get to the back half of 2016, the likelihood of it having a big impact in '27 is smaller. So it's really our first half bookings execution that could theoretically drive upside to that range.

And your next question comes from Ella Smith of JPMorgan.

So first for Matt, you cited very good traction with cross-sell in the quarter, particularly fraud tech. Can you please update us on the latest metrics as to how much room there is to still expand within your existing customer base for all the auxiliary products you sell outside digital banking.

Yes. I can take that. I mean one of the ways I would quantify it is if you just look at our Tier 1 customer base. So every financial institution above $5 billion, only 10% of them have all 3 of our retail, commercial and relationship pricing and fraud solutions. If you look at just the fraud opportunity, it's a little tricky because we have so many fraud solutions that are in the hands of clients standalone, meaning they are just on fraud products, and we can use that opportunity to cross-sell into digital.

But if you look at the digital banking customer base and say, how much opportunity could we -- or sell fraud products into that base, we still think there's a huge opportunity, maybe to the tune of 25%, 30% penetrated in totality, but there is a significant penetration opportunity when you think about not just the Q2 set of products, but also the Innovation Studio partner ecosystem in the fraud tech space. So it's very early days from our standpoint, when we think about the opportunity to monetize fraud products within the digital banking customer base.

Great. Very clear. And for a follow-up, given the strength of your free cash flow conversion, how do you weigh using your cash for share repurchases versus M&A versus anything else?

Yes. What I'd say there is the performance on the free cash flow generation side kind of gives us the flexibility to be thoughtful around what is the right answer at any point in time. You heard that in the fourth quarter, we started the repurchase activity associated with the authorization that we called out on the last earnings call. And you can assume with where the share price has been that we've continued down that path throughout January and the first part of February here.

But that doesn't preclude us from the other capital allocation alternatives that are out there. our cash balance, I think, gives us the freedom to still explore M&A actively. But the other thing I'll point to is as you look at the operating leverage in the business implied in our '26 and '27 outlook, you can see less expansion than what we've shown in '23, '24 and '25 in the next 2 years.

And a big chunk of that is reinvesting into areas like R&D that are going to drive an elongated growth trajectory for the business. So -- we are very focused on balancing that idea of generating more free cash flow, but also reinvesting it prudently into the business to drive long-term growth.

Your next question comes from Terry Tillman of Truist.

Congratulations on the fourth quarter, strong bookings finish. The first question is going to be double clicking and just digital banking, holistically. I'm curious, if we take a step back, where do you think we are in terms of baseball analogy on innings in terms of just dynamism and kind of replacement opportunities for retail, small business and then commercial. And then I had a follow-up for Jonathan.

Yes, Terry, I think if you think about the vast majority of banks and credit unions are using legacy core processor systems for digital banking, which in some cases, are in desperate need of an upgrade. And we just seem to operate at a pace different than they do. They're great companies. They'll be around for a long time. But the demand environment kind of tells you that we're differentiated in this for retail, small business and corporate with a single platform.

Jonathan talked about the expansion opportunities, which you have seen for the last probably 8 quarters, so whether it's an existing customer where we can go sell retail, small business, commercial or even relationship pricing or a net new customer, the customers -- our customers are doing very well. If you look at it, the stocks are up, they're operating in this environment pretty well. They got through the '22, '23 period of time. And they are focused on what we've been talking about all time, deposit acquisition, retention and growth.

They're looking for operating efficiencies. They're looking at ways for ways to generate revenue, which comes from commercial deposits largely. And I just think there is a significant amount of runway for us. And if I look at the pipeline, the ASPs, our win rates. It lays out really well for a great '26 and hopefully '27. So I don't know what inning that is, but just say the beginning of the fourth.

I guess for Jonathan, risk and fraud, can you remind us again, I'm sure you have an aggressive pipeline for '26. But I'm just curious like how quickly is that to go win it and be able to implement it and start recognizing revenue. Is that a faster time to revenue-type product. And said another way, is that potentially kind of a meaningful swing factor if you do upside your sub revenue, it would become from like risk and fraud and those products go in faster/

Thanks, Terry. I mean I hate to say it really depends, but it does from the standpoint of are you selling it standalone to a customer, in which case we can typically see implementation timelines that are faster than traditional digital banking. But if it's in the context of a digital banking net new, often it will follow the timeline of the go live on digital. For an existing customer that's already live on digital, though, that's where you can see faster time to revenue because if we're cross-selling a centric solution or an Innovation Studio partner on the fraud and risk side, that's where you can see much, much faster time to revenue outcome.

So it's a little bit of both. But like we -- in general, I would say that the timelines for going live on the fraud side are going to be faster outside of the very large net new deals that are associated with the digital banking implementation.

And your next question comes from Andrew Schmidt of KeyBanc.

Jonathan, good results here. Wanted to start off just on the commercial side. Clearly, the solution has been resonating very well in market. No surprise since the commercial side has gotten more competitive with Fiserv. And I think you're you're hitting that pretty well. Maybe talk about just how demand has evolved for the last couple of years and the demand into '26 is trending on the commercial side? And then maybe just an overarching question on just overall pipeline and composition would be helpful. I know you mentioned that in prepared remarks, but if you could drill down on that, that would be super helpful.

Yes. The real driver for the demand was the change in rates and the access to deposits and the importance of deposits. And as I've said many times, commercial deposits are the stickiest, the largest and the most profitable because they're able to charge for services around that, whether it's wires, ACH, information reporting, and so you're seeing a significant amount of demand for these products so that they can go get those commercial accounts and the operating accounts on the customers that they have lines of credit with.

And so that demand environment as long as rates are going to be in the vicinity. I don't think we're ever going to get back, or not in my lifetime, back to the 0% rate or 1% rate. I think that demand is going to continue because that's the lifeblood of these businesses. They've got to have the deposits. And I feel very good about that opportunity for us as we move forward.

As far as the shape of the pipeline, I think it will be similar to last year. I think you'll see larger -- the larger deals kind of come through in the second half of the year. We do have some nice deals in the first half. I think you'll see more out of PrecisionLender in the first half and more fraud than the first half just because of the momentum we have there. But we've got a really healthy digital banking pipeline, with some significant Tier 2s and Tier 3s and a couple of Tier 1s that are working for the first half.

I feel very good about the pipe for the first half. You closer to it and so you can see it. And then the coverage ratios for the back half of the year are really good as well. So coming off a really strong third quarter and the second best quarter in the history of the company to feel that way, we feel really blessed.

Yes. No, it all sounds great. And then maybe you could just ask on the 2030 targets, the margin targets, understanding those are longer term in nature, and they could fluctuate between now and then. But maybe just talk about some of the assumptions that go into that. Is there tech modernization in there? Is it just scale, cost optimization. Just if you could unpack that a little bit, that would be helpful.

Thanks, Andrew. It's really a combination of all the things you mentioned as well as the continued mix shift on the subscription side. So in 2025, full year '25 subscription revenue mix was 82%, as you get out to 2030, I'd expect that to continue to mix up into the mid-80s, if not higher. So that's going to be a contributor from a cost of sales perspective, we see efficiency opportunities throughout those line items, and we're still optimizing from a global offshoring perspective. We're later stage in that one, but there's still some execution there that will drive opportunity over the next 5 years.

And then as we think about the OpEx opportunities sales and marketing and G&A are going to be the biggest areas of leverage as you look out to 2030. And R&D, while maybe not as much, you can see that in the '26 and '27 numbers specifically. By the time you get out to 2030, we expect there will be efficiency that's driven from that line item as well.

And your next question comes from Matt VanVliet of Cantor Fitzgerald.

I guess as we look at AI, you mentioned a number of opportunities. So one, obviously, the efficiencies internally are seemingly already showing up. But maybe as we think about innovation studio and some of the other monetization efforts, how are you guys thinking about that between having very discrete sort of charges to use that? How does that mix in and then what is the sort of counter to that of just saying, here's more value of the platform that should help us win customers and maybe more slowly monetizing it over time, understanding that maybe some of these processes are the most compute-intensive like we might see in other areas.

Yes, Matt, the beauty of the Innovation Studio is we have a revenue-sharing model already in place. And we firmly believe we're the gateway for these AI products and features that could be coming to us and our customers are asking us to help with AI and how are we going to work together to do that. And then what's interesting is a lot of the companies that go to these banks directly, the banks are steering them to us. And so it just reiterates the point that we think there's an opportunity to partner with people to build our own products. And we are well down the path of building AI products using AI to help us become more efficient, helping our customers use AI products to become more efficient.

So it really sets up well for us with the overhang on our customers in a highly regulated environment, security, compliance, and the integrations and the trust we built with these customers over the last 20-plus years, puts us in a great position to capitalize on it, and we are very excited about it.

And then I guess, as we look towards the framework you outlined, so maybe this is for Jonathan, but I guess, how much of the yet to be released sort of in-process R&D components? Are you including in some of that or should we think about some of the moving pieces, potentially adding additional top line growth that could materialize and maybe give you some upside or at least some cushion in the targets you laid out?

Yes. I would say they would be upside to the targets. I think we have conviction in this model and this framework in the paradigm we're operating in today. Not to say that from an efficiency standpoint, we're not already seeing and expect to see more benefits throughout -- through that 2030 time period. But if you're talking about specific monetization opportunities and the benefits from what Matt talked about, that would be upside to this framework.

And your next question comes from Parker Lane of Stifel.

This is Matthew Kikkert on for Parker. To start, what is your view on kind of banking M&A landscape right now? And what impact does that have on your 2026 guidance compared to historical trends?

Well, clearly, it's picking up. And as we said in the prepared remarks and we've said historically, we -- last year, we were at 93% of the time, we're the surviving entity. We tend to have customers that are inclined to acquire other banks to grow. If you look at the number of customers we have over [ 5 billion ] , I think it's up to [ 200 billion ] now. 50% the top 100. So we feel very well positioned in the M&A environment. And Jonathan, do you want to talk about it? And I think it's going to continue, obviously, and Jonathan, do you want to talk about the -- in the plan?

Yes. And what we know in terms of deals that have been announced and that where we have either booked a contract with regards to an M&A deal that's now closed or we have visibility into it, that would be captured. What we don't do is model like hypothetical M&A that may be coming or that we don't know about as some sort of plug into the forecast where, again, in most of these cases, that would lead to upside. And to the extent in the 5% to 7% of time, historically, it has not gone in our favor.

Typically, that takes some time to roll off, including potentially being mitigated by buyout. So we feel good about it. I think we have a lot of conviction in the '26 guide we're giving and most of the time, we would expect there to be upside from the M&A outcome. And if there's anything that happened the other way, we think we could absorb it within the context of that framework anyway.

Okay. And then my second question is on internal AI efficiencies. I'm just wondering kind of what you're working on there? And how does that play into the EBITDA expansion target for 2026?

Yes. As we talked about in the November call, we structured the business in a way to where we could maximize our engineering team working with our hosting team, our support team and our delivery teams to make sure we're using all the AI tools that are available. Our go-to-market team is using AI tools, HR, finance, accounting, every single department of this company. are using AI tools to drive efficiencies in their business. And how we layered in, we're going to be cautious with that because there's an expense to get all these tools and then it takes a little time to do that. But we're seeing some early signs of some real positive outcomes.

Yes. What I would just add to that is, as you think about the '26 and '27 margin expansion commentary we provided and the ranges we gave we have conviction in those regardless of AI efficiency, and we do already see some early returns that are coming from internal use cases with AI. As you look out beyond 2027 and the path to that 35% target, I think that's where you can assume that AI efficiencies will have a meaningful impact.

But again, we feel confident in the ability to hit those numbers no matter how it plays out, but the early returns are strong enough that we certainly think by the third through fifth year of that framework, we're going to be seeing some meaningful leverage when it comes to AI across this company.

Your next question comes from James Faucette of Morgan Stanley. .

It's Mike Infante. Any interesting trends in the actual tech spend of your customers and how they're reallocating dollars right now? In particular, I'm curious if you're seeing vendor consolidation to fund AI-related spend? And if that would represent a sustained tailwind to more platform consolidation RFPs that would combine digital with fraud, commercial, et cetera?

Yes. I haven't seen it for AI purposes, but if you go back to '22 and '23, when rates went up so rapidly, you began to see vendor consolidation occur and it was -- the vendor consolidation was the back office providers and then front office providers. And we were obviously a net beneficiary of that if you look at bookings from the back half through '25. So I think that, that is where they started to drive the efficiencies to be able to spend more on digital experiences as opposed to kind of run the bank stuff. We consider ourselves change the bank.

And I think that trend will continue. And I think AI will be a tailwind to that as well that we're certainly in a position to capitalize on in talking with our customers.

That's helpful, Matt. And then maybe just on your Agentic strategy broadly, like what's the push and pull right now from customers? Do they want you to -- do they want agents to sort of operate within a Q2 governed framework? And if so, do you think that could represent a tailwind innovation studio just given its ability to sort of stitch together a variety of different point solutions.

Yes. I think you have to remember, these are probably the most conservative group of business people in the country. And compliance is where they start and the regulatory environment is obviously something that is something that they start with that when they start looking at technology solutions.

So as I said earlier, all of our customers that we've talked with are coming to us and asking about how they should think about it. We're still teaching them about a genic AI and the opportunities and how we can get ahead of other people by building these solutions with our customers and talking to them about how it works. And so that's why one of the reasons we talked about the system of context in that we have data that we think is really important, transaction flows, user behavior signals, integrations, real-time decision-making and allows you to not only know what they just did, but what they may do next, which is really where Agentic comes into play.

So we think there's a lot of opportunity there, and we're working with our customers. But we've tried some things and some have worked and some haven't, but we're definitely we think that's going to be a pretty big tailwind for us as we get deeper with our customers.

Your next question comes from Charles Nabhan of Stephens.

I know it's becoming a smaller piece of the revenue pie, but can you talk about the outlook for non-subscription revenue and given that it's dilutive to margins, the degree to which any recovery is assumed in the '27 or longer-term framework?

Yes. So from a nonsubscription standpoint, sort of commented on this briefly in the prepared remarks, despite the strength we saw in 2025, in totality, we expect the combined services and transactional line items to decline in both years. And as far as we can see for the foreseeable future in the mid-single-digit range.

So you're right, those are margin dilutive line items, but we also don't expect a recovery based on what we see. And the big drivers to that are really continued weakness when it comes to discretionary spending on services engagements as well as legacy bill pay. Those continue to be the drivers. And the upswing we saw in 2025 was really driven by a significant pickup from a really low base in M&A core conversions. And while we expect that to remain high, we don't expect that to grow off of the elevated levels of 25%. So you really don't see the opportunity to grow those line items to the extent we did in '25 as we look forward. So did that answer your question, Chuck. In general, we expect the profile to be mid-single-digit degradation in those line items and they are margin dilutive, but they're also shrinking in scale.

Got it. That's super helpful. And as a follow-up, and apologies if I missed this, but could you give us an update on the Innovation Studio from the standpoint of your monetization effort, how big it could become potentially as a revenue contributor as well as the role it plays in your overall AI initiatives.

Yes. I mean it's become a core part of what we are calling our platform from a digital banking perspective. When you think about the revenue model of that business, where we're getting net revenue from our clients and so the margin profile is very high. The adoption of both our FIs and their adoption of these products is increasing. 2025 was a very big year in uptick on all of our internal KPI indicators. .

And then to your point, in an AI-first world, we just see that our -- the value of our data and our distribution are something that's the best technologies, whether it's existing products that develop an AI-driven value proposition that modernizes their offering or a new AI-first product that wants to enter financial services that -- as Matt said, we are the gateway to do it.

And without the scale and security and maturity of the Innovation Studio, I don't think we'd be in nearly as good a position to capitalize on this opportunity So we feel strategically, this is a huge opportunity for this business and continue to see it as a revenue contributor, a margin contributor and a key element of both winning net new deals and retaining our existing customers. and being that path to capturing AI opportunities in financial services that we don't necessarily build.

Your next question comes from Matthew Inglis of RBC Capital Markets.

This is Matthew Inglis on for Dan Perlin at RBC. I was wondering if you guys could update us on the cadence and magnitude of the cost savings in 2026 as you exit data centers as part of the completion of the cloud migration. .

Yes, definitely. So you sort of see it in our framework when you look at our 2026 guide. We have included in that framework for '26 gross margin expectation of north of 60%. And so when you look at it, whether you look at the fourth quarter of '25 or the full year of 2025, we are expecting a significant step-up in that gross margin metric. And then as you think about now sitting here in mid-February, complete from a cloud migration standpoint, when it comes to customer migrations, and fully complete certainly in all facets as we exit Q1, if not sooner, we're in a great position to capitalize from seeing all of those data center-related costs roll off the P&L.

And so that's really the biggest driver of that step-up in the 2026 gross margin guidance that you're seeing. And then as you see that evolve to the target we put out for 2030 it's some of the levers I talked about earlier. And one of them includes once we've had a chance to operate in the cloud environment, there are opportunities to optimize elasticity and cost for the new environment.

And it probably just takes us a little bit of time in the cloud in the AWS to understand how to do that with conviction and safety for our customers. But as we get into '27 and beyond, we think there's another step function opportunity from a gross margin perspective within that cloud spend bucket.

Your next question comes from Cris Kennedy of William Blair.

There's been a lot of changes in the regulatory environment. Can you just give us an update on Helix and kind of the prospects for that business going forward?

Yes. I mean I think from a regulatory perspective, I wouldn't say there's anything in the last 3 months that has changed our our outlook for the Helix business. I think we are continuing to see opportunities. We talked about 1 in the quarter, a very large credit union that chose Helix for 1 of their strategic product offerings. And we continue to see banks and credit unions exploring what I'll call -- what we call fabric or core modernization opportunities that are really about bringing together a retail strategy that makes more economic sense relative to the legacy infrastructure that's out there for a certain cohort of their customers.

That continues to be the big opportunity for Helix going forward from an existing customer perspective, we've executed well in renewing our large number of -- a large existing client base and especially the ones that drive the majority of the revenue in that business. And then we feel good about the way that those businesses are investing and making their programs more profitable, and we're seeing the benefit of that. So no real change. Clearly not the demand environment that we saw back in '20 through '22, but nothing in the last 3 months that's pivoted our outlook on the Helix business at large.

Great. And then just we noticed the 50 SMB customers on the digital banking platform. Can you just talk about kind of the opportunity to expand that metric?

Yes. I mean when we think about SMB and commercial still and you think about the total of about 500 digital banking customers, that's a huge area of opportunity. I mean we think that SMB is an area of focus for a lot of these institutions and in some ways, a gateway to larger commercial. So we feel really good about that. And as Matt talked about, the demand for commercial is extraordinarily high, and we think our positioning and our differentiation on the commercial side is helping us win a lot in the market. So if there's anything to add?

Yes, I mean, the banks can -- as the bigger banks get bigger, they kind of abandon businesses that are $25 million, $50 million in revenue, and these customers need to expand their offering to go get a larger customer for the operating accounts, and that drives more revenue for us through utilization. So it's another tailwind for us.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.

Good afternoon, everyone. I'm William Tang, and I work with Bryan Keane, who heads the fintech research team here at Citi.

With me on stage today are Matt Flake and Jonathan Price, the CEO and CFO, respectively, of Q2. Thank you both for joining today.

Thank you for having us.

I wanted to start with a higher-level question, one that I think will be helpful for investors. Matt, can you frame for us where Q2 sits today within the broader digital banking and fintech ecosystem? How would you describe Q2's competitive differentiation across its [ solutions ]?

Yes. So Q2 is 22 years old. We're the largest standalone digital banking company in the world. And we provide digital banking, which is the experience that customers of a bank, whether it's a retailer or a commercial customer, feels when they interact with the bank. They log into the system and then they do their payments, their transfers, their balance inquiries. And so we have about 450 digital banking customers that we have 40% of the top 100 banks, 40% of the top 100 credit unions, but our platform scales to the smallest banks to up to a $400 billion, $500 billion bank.

And the differentiator for us is when we started the business, we built a single platform. And the single platform was designed to be able to allow a high school kid to start banking, go to college, start a business. They can add their business accounts to it on an on-demand function, and then they can grow that business and they can become a corporate banking solution.

So one of the challenges banks had in their -- community and regional banks had is they'd have multiple systems and they would have to start over, move all their data. And so they would lose customers. It was a dangerous time for them. And so for us, what we did is build a single platform so there's a unified experience across all mobile phones, tablets and desktops.

In conjunction with that, so the value of a single platform to a bank is you get a modern experience like Netflix, Amazon, Meta, you become operationally more efficient because you have 1 system to administer rather than a retail system that has a back office, its own set of integration, small business and corporate and all the other solutions that go with that. So you become more efficient as a bank. We as a company have one set of codes. We can roll code out faster.

And then the fourth piece is that we have all the data. So we have the behavioral data, the transactional data, the demographic data. And we can use that data for machine learning, AI, all those other things. So that's really the differentiator for us in how we built the business.

That's awesome. Just one more for you, Matt, and don't worry, Jonathan, I've got questions for you as well. You touched on this in terms of the TAM, but can you talk about how maybe broader, bigger picture, what is your targeted customer? How do you see the TAM? And then as you approach new and existing customers, do you typically start with just one offering? Or do you try to bundle as you lean into the respective customer bases?

Yes. So there's about 9,000 banks and credit unions in this country, and we have 450. If you get a little more specific to the target, we largely target about $750 million and above. There's about 2,000 of those. And from a bundling perspective, I talked about the platform, but we also have fraud products and we have a marketplace called Innovation Studio where startups, fintechs can participate. We have more than 200 fintechs that participate in that. With our APIs, they're able to integrate elegantly. And we have an economic relationship there.

We also have a relationship pricing tool that helps price a relationship for a bank. So 9 of the 15 largest banks in the United States price their loans and deposits on this tool that we use. So from a go-to-market on digital banking, we have a group that focuses on community, which is below $1 billion, and then we have a group that's focused on our key accounts, which we call, which is $1 billion to $5 billion. And then we have our Tier 1 and enterprise, which is above $5 billion. So we kind of go to market that way.

And so when you're below $5 billion to $10 billion, you're usually buying the total suite, which is retail, small business and corporate, and then the fraud products. As you go upmarket, above $10 billion, you typically have a business line that buys one of those aspects. So you have somebody who runs corporate, somebody who runs a small business, who runs retail, and they want to buy a best-of-breed solution in that case. And so for us, we're really proud of the fact that we are -- we have one best-of-breed retail, small business and corporate banking, the only vendor I know that's ever done that.

So if you look at our numbers, we have about 110 clients that are above $5 billion in assets, and 60% of them are only using one of those major products. So we have a significant cross-sell expansion opportunity within our customer base to be able to go cross-sell those products, plus our lending products and our fraud products.

Phenomenal. Jonathan, can you help us size the revenue materiality of your key solutions today? And how does the pipeline look for those solutions? And how can you faster -- how can you more quickly ramp new contracts?

Yes. So today, the way I'd segment the business, I mean, obviously, on the face of the P&L and the filings, we segregate revenue into 3 big buckets: subscription, transactional and services. Today, as of the third quarter, about 82% of the revenue is subscription revenue, which for us is the holy grail of what we're trying to win and strategically emphasized within the business. It's the highest margin component of the business. It's the fastest-growing component of the business. So that's what you see on the face of the P&L.

If you want to look at it more from a product standpoint, digital banking, which Matt just talked about, represents just over 80% of the revenue. And within the digital banking line item, you would also have our fraud solutions, which are mostly embedded within digital banking, even though there's some standalone element to it, and Innovation Studio because the partners all integrate through the digital banking platform to surface to the end customer. So that's about 80%.

When you think about everything from a major product line perspective, relationship pricing that Matt just talked about, our Helix and Symphonix business, together, they combine to mid to high teens, is their composition, and there's some smaller ancillary products. So Helix, Symphonix and PrecisionLender business. And what we shared is PrecisionLender is about twice as big as the other 2. So you start to get this 50-50 split of that other component that is the PrecisionLender business versus Helix and Symphonix are about equal weight.

Got it. Perfect. And then just to follow up there. When we think about the drivers of growth, is future growth expected to come from new logos or more upselling/cross-selling into the existing portfolio base? And what are the primary drivers there in your mind?

Yes. So both have performed really well so far in 2025. Just in the third quarter, we talked about a really strong performance on the net new side. But we're starting to see more and more, because of the fraud solutions, because of the Innovation Studio ecosystem, is the mix of bookings that are actually coming from an existing logo have expanded. That mix has grown from what historically was always about 50-50 to now we're seeing the expansion opportunity become sometimes 60-40, depending on the quarter, 65-35.

And the reason for that is, take a deal we talked about in the third quarter call, an $80 billion bank that's been a commercial customer of ours chose us for retail. Economically, that's as big as any net new logo, like that's a big economic deal for us, but it's from an existing customer that expanded, as Matt talked about, to buy another big piece of the platform. And so that's an example.

As those opportunities continue to surface, you're going to see the mix shift more and more to the existing customer components without that being a -- or denigrating the net new opportunity at all. You just have fewer logos, let's say, at the $80 billion level, in that example, to go win that new. And so we're taking the ones we have and also expanded within them.

Matt, going back to you. We get this question a lot, so it would be great to hear your take on this. But how has the macro environment, especially thinking about the trajectory of interest rates and the trend of bank consolidation, how has the macro affected customer demand in your pipeline? And are you sensing any adjustments from your existing or new accounts? Would love to hear your take there.

Yes. So I think that to understand what's going on in the marketplace, you got to have a little bit of context for the last several years. 2012 to 2022 were probably the golden era of banking where money was free and deposits were easy to get. And then you have the pandemic that happens in '20, which drove a lot of digital utilization, which began to expose weaknesses to the legacy technology that's out there provided by legacy providers.

And so then you hit '22 and rates go up 500-plus basis points. And so deposits again became the center of the universe. In the history of banking, deposits have always been the key to lend money against. And so they had to earn them and the rates were going up, so money was moving.

So we had this kind of perfect storm of deposits becoming the center of the universe, banks were exposed to their legacy technology during the pandemic, but they weren't able to do anything because they were busy doing PPP loans. And then you come out of that and you see the demand environment that happens as we began to see a lot more activity in '22 and '23. Then you have [ March of ] [Technical Difficulty] [ that are ] going to backstop those deposits. So a lot of our customers saw an exodus of commercial deposits from their commercial customers because their boards were saying, "We can't keep all this money in community and regional banks."

So you have utilization rates are through the roof, legacy tech, deposits are the center of the universe, and then the fear put in these banks that we have to lock in our commercial customers because they're the most profitable and the largest accounts. So that's really driven the demand environment for us over the last -- we've had record bookings '23, '24, we had our best third quarter in the history of the company this year. So all of that is what's driving the demand that we see.

And so the interest rates, I want them to go down for our banks so they can do more lending, they'll make more money, they'll buy more software from us. Because I don't think they're going away from this model where they just do the loan and they don't take the operating accounts. They have to have the operating accounts and they have way more discipline around that like they've had other than that 10-year stretch. So we continue to see a lot of demand for the platform because of our commercial functionality and the single platform and all the stuff I talked about earlier. And then you have -- there's a lot of pressure on the larger general ledger players right now, for different reasons. And that seems to be a tailwind for us as well.

So I think that people are asking, whether if rates go down, it slows the demand environment -- I don't believe it does. I think it's actually a tailwind because they still are going to focus on getting the deposits with the loans, they'll make more money, it will take more pressure off their P&L. So it's a really good environment for us right now, but we do want the economy to pick back up, so I think that will even increase the demand environment.

Got it. Got it. And then thinking about industry consolidation, I think bank M&A has been a topic for several years now. As this trend continues to take place, can you talk to us about how that does or does not impact your business? And on a consolidated basis, do you view Q2 as a net winner? Or is this a challenge that the organization can hopefully manage?

Yes. So M&A has been part of the community and regional banking space really since the early '90s. And what we look at is, obviously, we -- there's 9,000, so there's plenty of them. But what we look at is the number of people that are banking with community and regional financial institutions. And that has grown at a steady pace of about -- because we get paid on a commercial business or a consumer. So that's our revenue -- what generates our revenue. And so they're buying themselves. Bank of America, Wells, Chase, Citi are out of the acquisition game for the most part.

And so when you translate that to what that means to us, is if you look at like 2020 through 2023, we had 290 acquisitions or MOEs in our customer base. We were the surviving entity in 272 of them. So 90% of the time, we're the winning bank that remains. And so this year in '25, we're at 94% of the time we're the remaining entity. So it's a lift for us, and we continue to be on the right side of those trades, and we hope that certainly continues.

That's a very impressive retention rate. Jonathan, how should investors think about Q2's margin expansion opportunity? And how important is it in your mind that margins expand year-on-year at this point in time?

Yes. I mean it's been a big pivot we've made sort of around the time Matt just talked about when interest rates started rising. I think the history of the company, this has been a grow-at-all-cost type business and growth was the primary value indicator or value metric that we were measured on. And in 2022, we made a pretty significant pivot towards a strategy we've been calling profitable growth.

And if we're sitting here in November of '22, you would have looked back and seen trailing free cash flow that was negative. Whereas now you look back and you see the numbers we're talking about, $150 million of free cash flow approximately this year and expanding rapidly, and 90% conversion from EBITDA to free cash flow. So it's been a big part of the last 3-year journey to get this business more durable, more healthy from a financial perspective.

And then as we look ahead to '26, we already put out a preview into our financials for '26. And one of the reasons we did it is we had a 3-year financial framework that we've had out there since the beginning of last year. With the outperformance that we've put up in '24 and now in the '25 guide, the implied EBITDA expansion in '26 was really low. The average we gave over the 3 years basically implied only 30 bps of EBITDA expansion in '26, which we feel confident is very light.

So we put out there just here in the third quarter our expectation that gross margins will exceed 60% next year and that EBITDA expansion will be approximately 250 basis points of expansion versus that implied 30. And so I think we feel really comfortable that that is an ongoing part of our story.

250 is not as much as, for the last 3 years, we've shown over 500 basis points of EBITDA expansion. But what's embedded in that 250 bps for '26 is really now a '26 plan that incorporates a reinvestment back into the business in some of the product areas that Matt talked about. So Innovation Studio, commercial functionality on digital banking, fraud tech, AI, those are areas that we have now built the '26 plan that incorporates some of that reinvestment.

And so that's why the 250 bps doesn't look more like '24, '23 -- or '25, '24 and '23 levels of expansion. But we still think after 4-plus years of showing over 2,000 basis points of expansion, another 250 in '26 is still strong. And more importantly is we feel like that's what gives us the ability to elongate this trajectory of subscription growth rate that we've been on, which I think is really important for this business and for the opportunity we think we have in the market.

That was a thorough answer. You anticipated my follow-up. Matt, this is a question that you probably anticipated. But on the last earnings call, you spent a lot of time talking about the AI initiatives at Q2. Can you provide us the broad philosophy around how you plan to integrate AI into your platform? And how are you measuring success for these initiatives?

Yes. So we, on the earnings call, we talked about the structural change we made in leadership, which is we took our Head of Engineering and made him the COO. So he is going to be responsible for the delivery, support, hosting and building of the products. Because to make the product easier to install, the engineering team has to work on it. To make it easier to support, the engineering team has to work on it. Easier for hosting, the engineering team has to work on it. And so tying all that together gets one unified leader that has control over that to make sure that we're using AI tools and using our engineering team to build the best, most efficient products we can.

As a company, we have adopted enterprise-wide ChatGPT enterprise licenses for all employees. In 6 days, every employee had logged into it. We're using other tools, Cursor and other tools, to leverage AI internally as a company to make us more efficient and drive better processes.

From the customer perspective, there's 2 approaches that we have. One is to use AI in our platform to make them more efficient, whether it's how they -- the processes they have or how they scale their business. And then also building the products for their customers, which are the retail and commercial customers of the bank or credit union.

So at this point, we're fully committed to it. We're structured the right way. We have been using AI tools for quite some time. And we anticipate, whether it's fraud, cross-selling products to our customers or cross-selling products to the end user with agentic AI that could recommend, "Hey, you have too much money in your savings account. You need to put it in an interest-bearing account," or, "Your cash flow is looking low, you need to make these changes," all that is where we're going.

So we're 100% engaged in using AI and assuming that it's going to be a differentiator for us. I believe -- on the earnings call, I talked about I think there's really a couple of components that give us an advantage. Number one, I believe incumbency is an advantage in AI. We have more than 1,000 customers, we have contractual relationships with them. We have a compliance framework with how we keep the data. We're examined by the FFIEC, FDIC, OCC, FRB. All those regulating agencies come in and examine us. And so there's a trust component that our customers rely on. Two kids from Stanford that graduate and go to Huntington Bancshares and say, "I got this great AI idea. Send me all your information, I'll put it in my LLM," is not how these guys operate.

Those startups are going to flow through us through our marketplace Innovation Studio, we believe, to get access to that data. The data we have is all the stuff I talked about earlier: account activity, account balances, demographic information, behavioral information, what device they use, when they use, who they pay, how much they pay, how often they pay them.

And so we have all that. We have a contractual relationship. We'll have a -- with the financial institution, we'll have -- as the startups come through us, they will want access to that data. And we will participate economically with them, and also from a technology perspective.

And the distribution model. When we built this business, I was in rental cars and Southwest Airline flights going to hundreds, if not thousands, of banks telling our story. I don't think that's the model they're going to use. They're going to try to find people that have the data, have it organized and have it in a secure way where they can access it. And the bank is going to want that as well.

So we feel very good about our incumbency and the trust as well as the data we have and our ability to distribute those products, whether we build them or somebody else does. So we're really excited about the opportunity, and we think we have really intrinsic advantages that other people don't.

That's great. Maybe this is a good one for you still, Matt. But how do you guys think about the competitive landscape? Who or what do you compete against most frequently? And if there are any nuances that you'd call out regarding differences in dynamics as it relates to your larger versus your smaller clients, that would be great.

Yes. Jack Henry, Fiserv and FIS control about 95% of the back-office general ledger systems in the United States. And they have legacy digital banking systems that we compete with to replace. A lot of those companies are large global payments companies, some of them are general ledger companies with a little bit, and then all of them dabble in digital banking. But we wake up every single day and think about how does somebody feel when they use the technology, how does it work within the financial institution. And we move at a pace that's very difficult for these companies to be able to move.

So that's who -- upmarket, in particular, above $10 billion, Fiserv and FIS are largely the general ledgers there. Below $10 billion, it's Fiserv, Jack Henry and FIS. And we compete favorably against them. We have great relationships with them. We work closely with Jack Henry and we'll compete like hell, and we'll win some, lose some. But we try to be open and partner-oriented with them. So those are the -- kind of the main players.

And then you have, like in commercial banking, you have Bottomline Technology, which was acquired by Thoma Bravo, and Dragonfly, which was acquired by FIS. And those are more corporate, commercial banking solutions. We continue to make headway in that space. If you've seen our wins, we continue to win upmarket, which is where they are largely.

And then on the retail side, and some of these guys have small business products, you have Candescent and Alkami, which are good companies, but they're more focused on credit unions and retail, with some small business functionality. But we don't sleep on any of them. We continue to work and differentiate ourselves. But our win rates are around 50% in that market or even higher than that. So we feel really good about our competitive position, but there's still a lot of work to do.

Got it. Perfect. And in case anyone has any questions, we are feeling the mic today, so feel free to raise your hand. In the meantime, have one for either of you. If you think about some of the recent innovation that has emerged in fintech in the last few years, whether it's stablecoins or real-time payments or open banking, et cetera, where do you see the greatest potential for opportunity for Q2 longer term? And just would love to hear your thoughts around that topic.

Well -- and feel free to chime in. I think all of those are opportunities. It's about being in a position to partner, build or capitalize on those opportunities. So stablecoin is -- we don't -- we're not a payments company, but we initiate trillions of dollars of payments every year. And so if people begin to use stablecoin, when you log in, you want to see your current financial position, your assets and your liabilities, and stablecoin would be something we would partner with. There's several people we're talking with now about how to present that information to them so they can do -- they can transact off of those accounts and get a full picture of their financial position.

AI, I already talked enough about that. We believe our Innovation Studio is a huge differentiator for us and a huge opportunity that ties to open banking, it ties to innovation. One out of every 5 venture capital dollars from 2010 to 2020 went into fintech. And so the idea that we could go build all of that [ is impossible ]. So we open the system up with APIs, and now we can work with as many of those partners as want to come to us.

And as I said, we have a contractual and a financial relationship in those transactions. 100% of the deals we have done this year have said Innovation Studio is a reason for us to do that. So that gives us leverage. We have more than 1,000 non-Q2 engineers that work on our platform. So it gives us a lot of leverage and scale in the business. And we've been able to build this business -- we haven't done a major acquisition since 2019, so this is all organic growth that we're doing and building on. So we have a lot of opportunity there.

I think you covered it, Matt. At the end of the day, our job is to help enable the bank or credit union execute their strategies. And so if they have prioritization in their strategic road map around stablecoin, just like we did when Bitcoin was coming out and was a hotter thing, more in the sort of investing in crypto versus in the stablecoin is more of a payment use case.

But in the case of crypto, we said we're not going to be able to build the infrastructure, we're not going to be a custodian for holding the underlying cryptocurrency as Q2 or the bank. But what -- if our banks want to offer the ability to buy sell and hold cryptocurrencies to their customers, we have to help enable that. So we partnered, in that case, we partnered with NYDIG at the time, who had a partnership business, to basically embed, buy, sell and hold capabilities through Innovation Studio into the digital banking platform.

And so wherever the market goes in terms of these trends, whether it's stablecoin, real-time payments, financial wellness, we have a mechanism by which we sort of embed ourselves and help the bank execute that strategy. And as Matt said, it could be building our own products, it could be partnering with anyone that, through the Innovation Studio, is now much easier than we used to do before that. And then obviously, the potential for M&A, our job is to help the banks execute their strategy.

Great. I have one for you, Jonathan. What was the impetus for the new share buyback authorization? And what's the philosophy around its usage? And maybe as a follow-up, I'll just ask you right here, how are you thinking about balancing this buyback against the rest of your capital allocation strategy?

Yes. So back to the point I made earlier, we've come a long way in pivoting this business to be a highly cash flow generative company. And so with that, we've really seen a turnaround in the balance sheet. And so just last week, we paid off the 2025 converts. The 2026 is due at the beginning of June. We're in a position where most likely the play will be to retire those at maturity as well.

And so you kind of had, through the first half of '26, a $500 million maturity wall. But we're in a cash position, for the third quarter balance sheet, just under $570 million of cash and cash equivalents. We're generating cash, like I talked about earlier, the free cash flow generation to where the buyback, like all the other levers we've talked about, is just one more point of optionality we have to execute our capital allocation strategy.

Historically, we didn't have the cash flow generation to go down that path. Anything we wanted to do from a capital perspective was either investing back in the business or M&A. Now we're in a position, and the buyback is sized appropriately, to where we feel like, with the cash generation we have going forward, the balance we sit on and the balance sheet today, plus the maturities, that that's sized to where we can execute the buyback opportunistically, still be credible and competitive in M&A, and still invest back in the business, as I already mentioned, we're doing through the 2026 guidance that we already provided, to where we can do all of the above. And so we're not boxed in, in any way to where we feel like we have to do any one of those things at any one period of time. But we're in a position now where we have full optionality.

So we're excited about it. I think that's a healthy place for us to be compared to where we've been over the last few years, and we're going to use all those levers. But things like M&A happen when a lot of things come in line: valuation expectations, financial criteria of the targets, strategic imperative to own the asset. And so that's more episodic by definition. Investing back in the business I already talked about. And then when we're in an excess capital position where we don't have all of our cash going to those 2 things, then returning capital becomes the way we would go. And obviously, now with the buyback authorized, we can do that at our discretion.

Makes sense. Again, I just wanted to give the audience a chance to ask questions in case there were any.

Could you elaborate a bit on what some of those strategic imperatives are more from an inorganic strategy standpoint? It sounds like with the partnership ecosystem, it's easy to plug and play for all kinds of players. So curious how you think about that.

Yes. I very much think when Matt talked about like our product priorities, where we want to invest in '26, the M&A strategy, it's not like we're following a different strategy. It very much mirrors what the organic path would be. The opportunity would be when assets come to market, whether it's in the digital banking space, to scale and add functionality, or customers on the digital banking side, on the Innovation Studio side, like it is an incredible lens into these fintechs to see how they sell into the banks, how the end users adopt these products, where they churn these products, all that data that you'd never see in a normal M&A process, we get visibility into.

But the bar for why we would need to own one of those given this 2-sided marketplace we built, has scaled and is working, it's pretty high. Because take an example of an asset that traded in the market this year. MANTL is an account opening product in our space that we partner with and we are partnered with today even after the Alkami acquisition. But we have more than 6 other account opening products that are live in production in the Innovation Studio where a bank may have or choose the value prop of a Prelim or an Amount or an Attune or all these other guys, or grow for us, historically, our own products.

And so we've sort of put this position in the financial -- institutional landscape that we want to be Switzerland. And so for us to then go and buy one, it's not that we would never do that. In fact, I think that puts us in a real advantage to go be a buyer. It's just the bar is high of like why we would strategically need to own it, because you would most likely be compromising that Switzerland position.

So again, that's sort of why I think the bar is higher. But as far as where we go, it's those same areas. It's commercial, it's fraud tech, it's AI. It's all the areas where we're investing organic dollars that would be optionality for us on the M&A front too. And as Matt said, with so much fintech VC money that went in over the last decade, there's a lot of assets out there, and we don't need to own most of them, but it's possible that one comes to market where it makes a lot of sense.

Anyone else from the audience? Okay. Just one more question from my side, and feel free to take this from either of you. Just trying to be thorough here, but we've covered a lot today, what element of the business do you think investors either new to the name or even familiar with the name are under-appreciating at present? I'd be curious to hear which particular strengths come to mind.

Well, I think to some extent, the AI conversation we talked about. As I said, I asked people about -- tell me who -- what AI solution is going to replace us? And it's kind of like the Boogeyman with my kid, like I can't prove he's not there, but he can't prove he is there, but he stays up all night worrying about it. So I don't know what to do about that other than we got to continue to win in the marketplace and innovate and drive those. So I think there's a huge opportunity with the data and the regulatory framework that we work under to capitalize on the AI opportunity.

I also think that there's an environment where, just because Fiserv is having a rough patch, it doesn't mean we're having a rough patch. In fact, it could be a tailwind to us in some cases. So we're not all directly connected. And I think there's a big opportunity for us, even if Fiserv is having a tough time or FIS or Alkami, we can do well in this environment. And there is a demand environment that I believe is going to be strong for the foreseeable future because of the importance of deposits as we move forward. And rates can go down and lending can pick up, and we can -- that can still be a tailwind for us.

Unless we go back to a ZIRP environment, deposits are going to be a critical part of running a bank like they have for more than 100 years, so -- or thousand years. So that's the part where I think there's huge opportunity for us ahead of us. And early innings for us, less than 5% penetrated in the banking space. We have a long ways to go. And we have a lot of expansion opportunities, we have a great customer experience that we provide and a great culture. So we're going to continue to execute on that.

Thank you 2 so much.

Thanks, William. Appreciate it.

Thank you. Appreciate it.

Good afternoon. My name is Tyler, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings' Third Quarter 2025 Financial Results Conference Call. [Operator Instructions]

I will now hand the call over to Josh Yankovich, Investor Relations. Sir, please begin.

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 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 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 booking's 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 7 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 3 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 2 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 multiyear renewals with 2 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 Copilot 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.

And finally, we shared a new partner data integration strategy that is intended to enable us over time to turn our wealth of 1,000-plus back-end 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 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 12 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 lap 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 ARR, 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 booking's 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 the 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 to $206.4 million, and we are raising full year revenue to the range of $789 million to $793 million, representing year-over-year growth of 13% to 14% for the full year. We forecast fourth quarter adjusted EBITDA of $47.2 million to $50.2 million and are raising our full year 2025 adjusted EBITDA guidance to $182.5 million to $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 to 2026 3-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 7 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 3Q 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. And with that, I'll turn it over to the operator for questions.

[Operator Instructions] And your first question comes from the line of Parker Lane with Stifel.

Congrats on the quarter. Matt, some changes on the management team that you outlined here. I guess, coming off of bookings, a record bookings quarter here for 3Q. Maybe just talk about why now is the right time to make some of these changes to the structure of that organization? And what you expect the biggest changes we'll see in the near term are under the new leadership here?

Yes. Thanks, Parker. For us, it's -- yes, you guys live quarter-by-quarter. We didn't just do this overnight. We've been trying to structure the business in a way to align the technical resources where our delivery support, the people that build the product and host the product are aligned because so much of that is connected to the engineering team. And so Hima is a proven commodity for us. We've been really impressed with him. Kirk hired him as a big advocate for him.

And then putting Kirk in a position to do go-to-market and the product side of things, where he has deep experience. He's been a buyer. He's been a seller. He's been on our side as well. So it's just a perfect fit at this time, and we wanted to get it done before the end of the year, so we could put our plans together for '26 and beyond. So it's -- coming off a strong quarter just happened to be what happened. But really excited about these changes, and I think they put us in a position to really accelerate our products, our go-to-market as well as our initiatives around AI.

And I'm sorry, what was the other part of the question?

I think you touched on most of it there, Matt. Maybe just to pick up on AI, you highlighted some of the new development from the Dev Days. Obviously, AI is a huge focus area for every industry. But just wondering, if you look at year-end markets, what sort of appetite there is there, and more importantly, budget there is around AI? How much of a prioritization is this in your end markets? And what are you expecting the timeline to be there for contributions and benefits to your deal cycles as a result of it?

Yes. Keep in mind, we've been using AI for fraud and cross-selling and products like that for a while. Our buyers were the most conservative business people in the country, arguably in the world. And so they are leaning in and learning. We're having a lot of conversations around it. We're trying to understand the problems they want to solve from a product's perspective. And so that's how you educate yourself and build the right products. The Dev Days, obviously, there's a lot of activity there. So encouraged by their engagement with us, and we think there's a lot of opportunity there. When it folds into the revenue and the cost side of things, I'm not in a position to share that at this point, but we definitely think there's going to be a lot of opportunity there on both of those lines.

Your next question comes from the line of Terry Tillman with Truist.

Matt, Jonathan, Kirk and Josh, my first question, you actually have -- you beat me to it a little bit. I was going to have a lot to ask about AI. So you had a lot in your prepared remarks, and then, Parker had a good question on it. I guess, maybe another question kind of coming at this AI kind of angle or opportunity is, you talk about a single platform approach and how folks tend to cross-pollinate across commercial, small business and retail. Do you see maybe a quickening of the pace of, hey, we really need to clean up our digital banking front end though if we really want to do this AI stuff the right way? I'm not trying to put words in your mouth, but do you see this as potentially helping kind of accelerate some of this kind of brownfield replacement opportunities for digital banking before they actually buy some of these AI tools? And then I had a follow-up.

Yes. I think a couple of things to understand about what I think are differentiators in our space, in particular. Everybody has horizontal and vertical software in the trash right now. I would point out some things about our industry in particular. Number one, I think incumbency and trust are both factors that provide meaningful and durable advantages for us. We have hundreds of customers. We have thousands of long-standing integrations to complicated back-office systems that require constant care and feeding.

We have 20 years of compliance frameworks around securing the data that is accumulated on our single platform, as you mentioned, for retail, small business and commercial banking workflows. I think financial institutions need, and are going to require, a trusted partner to help them adopt AI safely and responsibly when you're talking about the buyers we're dealing with.

And from -- and then there's a data and distribution advantage we have. We have 27 million end users, average of 3 accounts per user with probably an average of 7 years of history. That includes posted transactions, balances, payments, behavioral data, demographic data. And we're going to continue to use that data to enhance our customers' end-user experience, back-office operations, fraud prevention, cross-selling capabilities, efficiencies for us.

And then you have a vast partner network that we believe will continue to work with us to distribute their AI solutions focused more on use cases that we will work to integrate into our workflows and complement the digital banking experience. And so that, coupled with the announcement we made today around the structure of this company in a way that it'll empower us to capitalize on the strategic advantages over the coming years. For us, the customers and Q2 team are excited about this opportunity. We just have to execute on our plans, which we have a track record of doing.

So there's a lot of opportunity there. We're using it internally, externally with customers and everything else, and we're seeing real progress in that area. And we don't anticipate to sit on our hands and wait for somebody to come do this. But I do believe the incumbency and the trust aspect and the data and the distribution capabilities are significant tailwinds for us in this race.

That's great to hear. And I guess, I don't know if this is for you, Matt or Jonathan. And I'm not usually wanting to start looking at numbers and asking numbers questions on the calls. But it does look like it was a pretty substantial uptick versus the prior year on like RPO. And I know the subscription ARR picked up some, and I know some of this was kind of churn timing from last quarter. Where I'm going with this is we knew second half or we thought second half would be stronger than the first half on just the seasonality of your bookings. But I usually think of 4Q as the big quarter. Is there any tilt that's different potentially this year in 3Q to 4Q bookings?

No, we are cautiously optimistic about the fourth quarter. We're focused on getting deals done. We have a lot of activity. I see a lot of good indications, but I don't know anything until it's done, but we are -- the pipeline is strong. We didn't drain it in the third quarter, and we're going to -- we intend to execute on those and continue to build the pipe for '26.

Terry, the only thing I'd add is, as we talked about at the beginning of the year, the mix of first half versus second half was going to -- we predicted would be slanted towards Tier 1 and enterprise in the second half. The third quarter was a great start to the second half in that regard because we did see a really strong performance in that upper tier in that Tier 1 and enterprise segment and saw from a sub's ARR bookings perspective, by far, the strongest quarter of the year as that -- as we expected. And as Matt said, no feeling like we borrowed from the fourth quarter. So I feel good about the opportunity moving forward, but we got to execute on it.

Your next question comes from the line of Andrew Schmidt with KeyBanc Capital Markets.

Guys, good to be back on the call. Great results here. Great to see the sub ARR acceleration on top of a tougher comp. I wanted to ask about just the 2026 sub's ARR growth of 13.5% you outlined. Continue to see good long-term growth trends. But I guess you have to make some assumptions when you're providing that outlook. Obviously, you have good visibility given the recurring revenue base, but there's cross-sells, there is existing user growth and things like that. Maybe you could talk through just some of the assumptions that are in there.

And then also, you commented on the bank M&A environment. Historically, it's been a positive for Q2, and we seem to kind of be in the sweet spot here given the current environment. Maybe talk about whether that's layered into those assumptions or whether that could be incremental?

Yes. Thanks, Andrew. So, to hit the first part of the question, when we think about sort of the 13.5% for 2026 subscription revenue growth, that's mostly informed by the bookings outcomes year-to-date and the mix of those bookings, which gives us good visibility into 2024. When you think about what we do in the fourth quarter of this year, smaller deals, cross-sell, renewal activity, that can have an impact. But the bulk of it, we have visibility into based on actual bookings that we've obtained so far year-to-date. So we feel really good about that number, have conviction.

And most importantly, the performance in the third quarter gave us the confidence to lift it from what we had predicted and communicated all throughout the year at 13% up to 13.5%. So it has assumptions around ongoing performance in line with what we've done when it comes to the near time to revenue levers, like cross and renewal activity, but there's no sort of incremental impact from the net new stuff that we're experiencing -- expecting significant impact in '26.

From an M&A perspective, that's a little bit different. There, we don't really build that in from the standpoint of upside for our subscription revenue base. We do have some visibility, and we certainly make assumptions around services work tied to M&A. And I think that's informed a little bit in some of the non-subscription line item guidance we gave on the '26 front.

But to the extent that goes more in our favor than it has historically, that would be upside to the plan. But we've seen a pretty strong year from an M&A standpoint. I mean, Matt talked about 2 deals this year, where we won up into the acquirer tech stack and for the combined bank, which is a great sign for us. But overall, M&A activity from a services perspective has been pretty high in 2025. And so we expect that to continue in 2026, but not necessarily to see the same growth we saw year-over-year relative to 2024.

Perfect. And then if I could -- if I just could ask about just quickly on pricing, it's been a topic of conversation with investors. And I think typically, Q2 has been premium priced just given the value that you bring to clients. But maybe to comment if you're seeing anything different in the environment since it has been a discussion that's come up, not specifically Q2, but just broader in terms of the industry. But any comments there would be helpful.

No, there's nothing abnormal. I mean, a lot of people that don't have the feature functionality we have, they use price as a tool to try to win deals. And sometimes banks go for that. We have a lot of discipline around that. We will walk from a deal if it doesn't fit our economic model and hope to pick them up later. But there's no significant change on the pricing side of things from what we've seen from people.

Your next question comes from the line of Matt VanVliet with Cantor Fitzgerald.

Curious on -- given your recent success of upselling, cross-selling your existing customers, how should we think about the renewal cohort over the next 5 quarters or so? Any differences in sort of the shape or size of the cohorts coming up for renewal? And within that, is there any outsized opportunities where maybe you're already on retail to sell commercial or commercial to sell retail and things of that nature?

Yes. Thanks, Matt. I'll take that. I mean, to your last point, yes, we have lots of those opportunities, and that certainly make up some of the larger, what we call internally, cross-sales significant deals that are in the pipeline. But when it comes to the makeup of the '26 renewal cohort, we did -- we talked about this earlier in the year. But when you look at the performance on renewals in '23 and 2024 combined and look at the composition of that cohort and compare it to the '25-'26 cohort, it really is very, very similar, both in terms of number of opportunities and the mix within them. So we feel really good. It's not -- and it's not as though the renewal performance so far in 2025 has borrowed from '26 or anything like that. So we feel really good for the fourth quarter of 2025 and throughout '26 that the opportunity set in front of us, both in terms of number of deals and the size and shape of them, are comparable to what we've done in recent periods.

Great. And then, as you look at the opportunity for Innovation Studio, not needing to build every little agent or AI widget out there by leveraging partners, seems like a big opportunity. And maybe as banks are a little more willing to accept AI technology is sort of where we're going, should we think about Innovation Studio maybe even further accelerating here now that you have at least one product in virtually all your customers? And how should we think about the overall revenue contribution in '26 versus still being a couple of years away from real materiality?

Kirk, why don't you take the Innovation Studio product question, and then, Jonathan can take over. Go ahead.

Yes. From an Innovation Studio perspective, really 2 important points in there. One is that if we sort of think about our existing partner ecosystem and the new partners we're bringing to the ecosystem, it continues to be really important for them to have a partner like us who has great technology, great distribution, but also kind of like this very strong technical backbone on which to build their solutions to because you can have these features and functions that these fintechs deliver. But if you don't have all the data, all the APIs, all the integrations that we do, you really can't get as far with them. So that continues to be really important.

If we think about it from an AI perspective, what we're seeing is those partners are really kind of continuing to come to Q2 to co-develop and distribute their AI solutions. And that's not just our existing fintech ecosystem, but it's also what our customers are building for themselves and also new players that you might see in the market like the services companies and others that want to build kind of specialized AI agents that they can distribute into the financial services.

Again, all of that is really important for our Innovation Studio because if you think about the legacy financial services infrastructure, if you don't have a partner like us, it's really hard to scale any kind of solution into that environment. So that's where we see a lot of strength currently.

And what I'll add up from a revenue growth perspective, '24-'25, we've seen phenomenal revenue growth from the Innovation Studio ecosystem. And you're right, we are seeing some use cases that are pretty exciting in terms of the adopted fintech partners and the entire ecosystem all thinking about AI in terms of their own point solutions and then us getting the benefit of that as there's adoption inside the platform. So we're excited about it. We think '26 will be another great year of growth from an Innovation Studio revenue perspective. And as a reminder, like that is very high-margin revenue. We're only recognizing it on a net basis. So it's a valuable revenue stream to us, and we are building a go-to-market apparatus and investing in the go-to-market team to try and capture that growth opportunity that you're asking about, Matt.

Your next question comes from the line of Ella Smith with JPMorgan.

So first, I was hoping to ask about seasonal trends. Are there any seasonal trends to note when it comes to cross-sell from existing customers? And how long does it usually take cross-sell commitments to hit your revenue line?

From a seasonality perspective, yes, the fourth quarter is usually our biggest cross-sell opportunity. It's the end of the year, people trying to fill out their budgets. I was really happy with the third quarter. Some of that was from our Connect conference that built up and the excitement from seeing the products. And then the fourth quarter should be as strong as cross-sell opportunity.

Yes. And from a time-to-revenue perspective, unlike net new, these can go to revenue much, much faster. It just varies depending on the product. And so some of the stuff can get live really quick, especially when you're talking about cross-selling, let's say, an Innovation Studio partner that's already in production to certain products that maybe there is a, call it, 3- to 6-month timeline on the outside, in some cases, if it's not sort of a cross-sell of the digital banking component like retail to commercial or vice versa. So if it's an ancillary product, the timelines are faster.

That's very clear. And for my follow-up, can you speak to the appetite of existing and prospective customers to reinvest in technology? Is it changing given it's a somewhat lower interest rate environment?

The demand environment has been strong, and it remains strong. I think interest rates, there's still uncertainty about what they're going to do. I think from a customer perspective, whether it's a bank or a credit union, they don't want to be caught in the situation they were in, in the 2012 to 2022, which is they were doing the loans, but they didn't have the operating accounts. So they learned their lesson, and they're trying to get the best digital banking, retail, small business, commercial solutions so that they can get the operating accounts when the lending environment comes back. And so they want to have the best product, and that's why we continue to win in that space, and I think we're going to continue to. So demand is strong, and I anticipate it continuing to be strong even as rates go down, assuming they will.

Your next question comes from the line of Cris Kennedy with William Blair.

Just wanted to follow up on the gross margin outlook for next year. Can you just talk about some of the levers that you have to get to that 60% target?

Yes. For sure, Chris. So the single biggest lever that we will see driving that upside in 2026 is the completion of our cloud migration project on the digital banking side. And so we'll be completing that here at the end of '25, very early in 2026. And so as we exit the data centers, you see that depreciation roll off, the very clear cost savings coming off.

And then, as you think about operating in the environment that we're in from a cloud perspective, there's just so much opportunity for learning that environment and operating with more elasticity, more understanding of how to be efficient in that new world. And so we feel really good about the guidance we've given. But there's also all the other things that go into that in terms of revenue mix, AI efficiencies, all the things we're doing across support and delivery to become more efficient that are all accruing into that gross margin line.

Your next question comes from the line of Alex Sklar with Raymond James.

This is Jessica on for Alex. So sort of touching on what you've been saying about the strength in your risk and fraud solutions and your cross-sell, how should we be thinking about the contribution of risk and fraud to -- as a percentage of bookings year-to-date relative to previous years?

We've never discreetly given projections around risk and fraud because so much of that solution is embedded within digital banking, but we can say that the growth of that business exceeds that of most of the other product lines that we have. And so you are seeing a greater mix in 2025 than we have historically in terms of the contribution from the fraud tech solutions. And I can say, as we think about the plans for 2026, we see a demand environment that suggests that will continue.

Got it. And also, thinking about -- so we've been hearing some concerns in the end market about credit risk over the last couple of months. I think earnings have been turning up better than feared. But can you provide some color on what you're seeing from the health of your customer base? And any changes in demand patterns in terms of your solutions that may be are more focused on the credit side?

Kirk, why don't you take that?

Yes. On the credit -- so if you sort of look broadly, and we -- again, we pull all the call reports on all of our customers. So we watch this really closely. The banks are really well reserved right now. I think we would start to start there, and that's -- if you look back kind of like even on a 10-year basis. So what we see is, although there's been a couple of banks that have had to report some losses here recently, if you kind of look more broad-based, even in those banks, they were well reserved to be able to handle those losses that they reported.

And so right now, credit quality is actually holding up pretty well. Those credit provisions look like they're in a healthy range. What we see in our PrecisionLender relationship pricing line of business, continues to be very strong in terms of the demand for that product as customers are thinking about how do I reprice relationships as the interest rate environment changes, particularly since there's still a little bit of uncertainty in terms of exactly how that's going to play out and as they're thinking about '26 and what their growth trajectories look like. So don't see any red lights on the credit front yet.

Your next question comes from the line of Charles Nabhan with Stephens.

Congrats on the results. A couple of quarters ago, you gave some real good metrics around the cross-sell opportunity between retail and treasury management. And I wanted to revisit that to get a sense for how much runway or wood there is to chop within the customer base in terms of cross-selling those 2 products. Also, I wanted to touch on whether you're seeing more uptake of both commercial and retail solutions on your newer deals.

Yes. Thanks, Chuck. Yes. No, that's a metric we track closely. It's a huge -- you call it TAM or SAM opportunity inside our customer base. When you think about cross-sale of significance, what we call it internally, we still have, call it, in a customer -- Tier 1 customer base, so financial institutions over $5 billion in assets. Only 10% of them have all 3 of retail digital banking, commercial digital banking and PrecisionLender or relationship pricing as we call it now. And so that is a huge cross-sell opportunity. And that dovetails well into your second point.

We still see a good mix of deals that start with commercial, go to retail. We had a great one like that this quarter, and we see that all the time. But you also have some really good. We had a great net new win that went for the full platform. And so it just -- it depends, and both of those were Tier 1 institutions. So it just depends on the strategy and the timing and the budget of the financial institution. But we feel really good about that. That's why we win a lot. That's a big differentiator for us. And again, from a cross-sell perspective, that continues to be a huge opportunity given how few of our Tier 1 institutions have all those different products.

Got it. And as a follow-up, I wanted to talk about your product roadmap and get a sense for how you balance M&A, partnership and organic growth as well as what specific products or areas you might look to as a means of either enhancing your existing functionality or broadening your TAM?

Yes. I mean, I think the platform, we look at it and say, on the retail side, we want to make it more personalized for users as they log in and they can have things that are relevant to what their day looks like. From a business perspective, we want to continue to -- we want to add that functionality as well. Plus we want to add deeper commercial functionality that allows people -- the banks to go help there -- to go acquire larger businesses in their region.

Fraud, obviously, we're investing heavily in that. Innovation Studio gives us a lot of scale in a lot of different products. And then, also the ability for us to cross-sell and market products. And then you have AI tied to all of this, whether it's operating efficiency for the bank, agentic AI to help people understand what they need to do. So there's all of these products that we have. We have a core modernization strategy with Helix. There's a lot of different things that we're doing that are going to expand our TAM and kind of grow with our customers as they try to get into new areas and sign new customers and gather more deposits. So strategically, we are really well positioned.

Kirk, if you have anything to add, feel free to add. I don't know if I broadly covered it.

No, I think you broadly covered it. I mean, again, what we see from our customers, and we've had 3 really great customer events over the last 45 days, and they reinforced this in addition to our Customer Advisory Board, but they're really looking to us to help guide them through this current stage of innovation. We brought them through digital, we brought them through mobile, we brought them through cloud. We're going to bring them now into AI. And so having that trusted partnership and really being very interactive with us in terms of the feedback that they give us and the feedback we give them in terms of what the roadmap should look like is a really powerful kind of flywheel for us.

And Chuck, to the first part of your question around build versus buy versus partner, I mean, we think about that all the time. It's an equation where we want to be able to exercise all of those different levers. And obviously, we're building products, and the Innovation Studio ecosystem along with some of our long-standing partnerships pre-Innovation Studio, we have a very robust partner strategy.

And then when it comes to buying, I think it's obviously a part of our long-term strategy and one we've exercised in the past. But the bar has been raised for what it would take for why we need to own an asset and how we think about valuing the asset and what the financial criteria of those businesses would need to be. So all 3 of them are relevant, and Matt and Kirk covered the areas where we would be interested, and that would be the same in the context of M&A.

Your next question comes from the line of Dan Perlin with RBC Capital Markets.

I just wanted to touch base on kind of the macro, kind of the state of what's been happening here as of late in that there's a bit of a dislocation, I think, happening with one of the large core providers. They're going to go through a lot of, I would say, change over the next couple of years in terms of their core consolidation. And I know we're not specifically talking everything on your business. But I'm just wondering how much kind of the derivative fallout from that could create some really interesting RFP opportunities for you guys over the next couple of years. And just how would you frame that in that context?

Yes. Historically, as I've seen core consolidation happen over the last 25-plus years, it generates opportunities for us. So when a bank is forced to -- or credit union is forced to switch off of the general ledger they're running on, it pushes them to go evaluate all their technology and what they want to do because it's such a disruptive thing for them. So I -- RFP volume, I looked at it before, is similar to what it was last year right now, but this stuff is just kind of hitting the market now. So it's something to watch. Obviously, we're paying attention to it.

For us, we know all the prospects in banks and credit unions. We're calling on them all the time, marketing to them and keeping our name in front of them. So when they do decide to take a look, hopefully, we get called. That's the objective. So other vendors have different challenges. We've all had challenges at different times. And I don't -- I expect those to get fixed. And so we can't rest on our laurels and think some of that stuff is going to be a problem. And so we're going to continue to attack the market we're going after and use our product and our customer experience and our culture as a differentiator.

Yes. No, that's great. Just a quick follow-up. On the '26 guide, if I'm just looking at the numbers, and they may differ a little bit, but like it looks like the incremental margin on EBITDA somewhere in the high 40s, low 50s versus kind of in the 60s kind of where you are maybe going to land this year. Again, maybe there's a little bit of squishiness in the numbers. But net-net, it looks like it's coming down a little bit. Is that because there's like this investment opportunity cycle that you're going into, especially given the fact that you've got this migration on the gross margin side, and it does feel like there's plenty of other opportunities for leverage? So I'm just wondering what's maybe a little bit more embedded in that.

Dan, let me make sure I'm getting your question right. Are you referring to Q4 EBITDA?

No, '26 guide EBITDA, 250 basis point margin expansion year-on-year. Just the incremental margin on that would suggest it's probably closer to 50 versus maybe 60 that you're going to land on in 2025.

Yes. I got to make sure I'm following you. When we look at our 2024 to 2026 financial framework, one of the metrics we talked about was EBITDA margin expansion. And what we talked about there was the 3-year average, '24 to '26 would see 360 basis points of improvement on average. With 2024 in the bag, and 2025, the guide we just provided, both well over 500 basis points of expansion each of those years, the implied 2026 EBITDA margin expansion before the color we gave today was quite low. It was sub-100 basis points in terms of the implied '26 margin expansion. In providing that 250 basis points of expansion, I think what we're trying to show is we actually expect more operating leverage in 2026 than what those numbers implied. So hopefully, that helps. I just -- I didn't reconcile that to the 40 to 50 number you were talking about.

Yes. No, that -- believe me, I'm not knocking on the 250 basis points. That's a great number. I was just referring to the incremental margin associated with that embedded for '26 versus '25, but we can have that in our follow-up call. Thank you.

Okay.

Thank you. There are no further questions at this time. This concludes today's call. Thank you all for attending, and you may now disconnect.