Q2 Holdings Inc (QTWO) 2014 Q1 法說會逐字稿

Good afternoon. My name is Candace and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings' first-quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. Bob Gujavarty, you may begin your conference.

Good afternoon, and welcome to Q2 Holdings' first-quarter 2014 earnings call for the period ending March 31, 2014. I'm Bob Gujavarty, Vice President of Investor Relations. And with me today on the call is Matt Flake, our President and CEO; and Jennifer Harris, our CFO.

As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available on our website following the call. By now, you should have received a copy of our press release that was distributed this afternoon. If you have not, it is available on the Investor Relations section of our website.

Please remember that certain statements made during this call, including those concerning our business and financial outlook for the second quarter and full-year 2014, are growth opportunities and expectations; areas of strategic focus and investment; our market opportunities and anticipated demand for our products; anticipated timing and returns on our prior investments, including our data center, upgrade and sales force expansion; anticipated benefits from larger customers; benefits from our IPO; expectations regarding growth in number of users and changes in revenue mix, are forward-looking statements.

These statements are subject to a number of risks, uncertainties and assumptions described in our SEC filings, including our Form 10-Q for first quarter of 2014, which we anticipate filing with the SEC on or before May 15, 2014, and the risk factors described in our final prospectus dated March 19, 2014. Should any of the risks or uncertainties materialize, or should any of our assumptions prove to be inaccurate, actual results could differ materially and adversely from those anticipated in these forward-looking statements.

These statements are also based on currently available information, and we undertake no duty to update this information, except as required by law. Cautionary statements regarding these forward-looking statements are further described in today's press release.

During this call, we will be referring to both GAAP and non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business, and they're reconciled to GAAP in the tables attached to our press release available on our Investor Relations website. The non-revenue financial measures we will discuss today are non-GAAP unless we state the measure is a GAAP number. Any non-GAAP outlook we provide has not been reconciled to the comparable GAAP outlook because, among other things, we cannot reliably estimate our future stock-based compensation expense, which is dependent on our future stock price.

With that, thank you for joining us. And I'll turn the call over to Matt Flake.

Thanks, Bob, and thanks to all of you for joining us today for our first call as a publicly traded company. As you are aware, we priced our IPO on March 19, 2014, and closed the transaction on March 25.

During today's call, I will provide highlights from our first-quarter 2014 results and an overview of Q2 Holdings, including a description of our strategy and some important recent developments. I will then turn the call over to our CFO, Jennifer Harris, who will take you through the financial results in more detail, including our outlook for second-quarter 2014 and full-year 2014.

Q2 Holdings is happy to announce a strong start to 2014. For the first quarter, we are reporting total revenue of $16.8 million, representing an increase of 31% year-over-year. In addition, we are pleased to announce a total of 3.5 million registered users on our platform, up 33% year-over-year.

Since this is our first call as a publicly traded company, I'd like to take a few moments to provide some background on Q2 for those unable to hear it on the road show. Q2 delivers cloud-based virtual banking solutions via a SaaS model to regional and community financial institutions, allowing them to deliver anytime, anywhere, any device, banking to their commercial and retail account holders.

The business of banking is rapidly changing from an in-person/in-branch model to a digital and self-service model. The challenge for these institutions is to adapt to meet the changing customer expectations and preferences. Our founding team has provided software solutions to regional and community financial institutions for over 20 years. And when we started this business almost 10 years ago, we had the chance to start over and design our virtual banking platform from a clean slate.

The Q2 platform has over 190 integrations with backend systems, which, combined with the highly secure and regulated banking industry in which we operate, provide Q2 a significant competitive advantage in the market. Our solutions address a very large and growing opportunity across regional and community banks and credit unions. Our total addressable market includes over 13,500 financial institutions, which we believe collectively represent more than a $3.5 billion annual market opportunity based on our current prices and solutions.

With more than 350 customers, we have only achieved 3% penetration in our market, so we consider ourselves to be in the early stages of this opportunity. Additionally, as financial institutions increase their focus on digital services, they are, in turn, increasing their spend on analytics, devices, and the security that goes with them. This increased spend is where Q2's current and future products are squarely focused.

In order to take advantage of this market, we doubled our sales force in 2013. I'd like to remind everyone that it takes 9 to 12 months for a sales rep to become fully productive, and 6 to 9 months for that productivity to impact topline revenue. And we anticipate beginning to see the acceleration from this investment in the second half of 2014.

Traditionally, we focus our sales efforts on regional and community financial institutions with assets less than $10 billion. However, we've added several Tier 1 institutions defined as those that have assets between $5 billion and $50 billion over the past year. And we are excited about our momentum in this market segment, as these larger institutions have a higher share of customer accounts and potential registered users.

In addition, several of our existing customers have grown to become Tier 1 institutions while utilizing our solutions. Q2's growth is driven in large part by more registered users on the platform, and therefore, we believe adding larger customers will contribute meaningfully to revenue growth and margin expansion.

Now I'd like to discuss a couple of key first-quarter wins that demonstrate the continued execution of our sales organization, as well as a high-level view of why Q2 solutions are playing a central role in the transformation underway in the regional and community banking space.

The first is a top 100 bank in the southwestern United States, with more than $10 billion in assets. In this win, Q2 will be replacing a Software Development Toolkit, also known as an SDK, which happened to be acquired several years ago by a legacy core processor we compete against regularly. Because of the nature of the SDK, specifically the support and financial resources required, the bank determined that working with Q2 will provide scale, efficiency, and a modern platform for their virtual banking delivery. By selecting Q2, support, performance and customizations will be normalized around a single, well-understood code base. Additionally, because of the bank's commercial focus, Q2's integrated commercial security solution, called Risk & Fraud Analytics, was a key driver for this replacement win.

The second new customer win I'd like to mention is a top 100 credit union located in the southeastern United States. This credit union has a large active membership base. Their current solution, while provided by a legacy core processor at a lower price than the Q2 solution, is not delivering the integrated unified user experience across online mobile and voice that their membership base is demanding.

Using Q2's platform architecture, their members will enjoy the benefits of a single login, a single set of workflows between retail and small business functions, as well as a single view of their account activity -- a definite upgrade from their current user experience, and a much-needed boost for the credit union's brand as a leader in convenience and service. With our platform's integrated, small business functionality, this credit union will be able to leverage their virtual banking solutions to grow their small business accounts, while providing a consistent look and feel with their retail solution.

While these two wins were against core processors, we are still competing favorably against our other competitors: point systems providers and payment processing companies. We continue to see our cloud-based approach to this highly secure and regulated industry providing long-term benefits to our existing customers.

In addition to our strong first-quarter, we recently concluded our annual Client Conference. And with over 400 attendees, I'm delighted to report record participation from Q2's customers, prospects and partners. The news of our IPO was well received. Customers and prospects alike are encouraged about our financial outlook. These critical stakeholders, representing both banks and credit unions, believe the strength of our post-IPO balance sheet and the transparency of our ongoing public reporting, serves to strengthen the viability of Q2 as one of their key strategic vendors.

On the operations side, we completed the migration of our remaining customers from our Las Vegas data center to our new data center in Dallas. The data center move was on budget, ahead of schedule, and delivered with better-than-expected uptime. As a result of this consolidation, our customers are experiencing improved responsiveness from our solutions. And we believe Q2 will realize operational efficiencies over time. As we continue to scale our business, we believe the cost-effectiveness of this new data center will directly contribute to improved gross margins and a better customer experience.

We continue to see strong demand in the marketplace. And to support this demand, we are driving three key corporate initiatives: growing our sales organization to continue acquiring new customers and cross-selling to existing customers; scaling our business to continue providing a world-class customer experience, while aligning with our goal of improving gross margins; and building new industry-defining products, a hallmark of our success.

At Q2, we are proud of what we've built and excited about the opportunity ahead of us. Our revenue model is characterized by high retention rates, long-term contracts, and high revenue visibility. And we are focused on topline revenue growth as well as margin improvement. We believe we are in the early innings of a multibillion-dollar market opportunity. And with the resources from the IPO, we are extremely well-positioned to pursue our growth strategy.

With that, I'd like to hand the call over to Jennifer, our CFO, for a more detailed discussion of our financial performance.

Thanks, Matt. We are pleased with our first-quarter results. And I would like to quickly review our financial model for those of you who are new to Q2.

Given that our average contract length is over five years, Q2 has the vast majority of the current-year revenue under contract at the beginning of the year. We price our solutions based on the number of solutions purchased by our customers and the number of registered users utilizing our solutions. We earn additional revenues based on the number of bill-pay and certain other transactions that registered users perform on our virtual banking solutions, in excess of the levels included in our standard subscription fee.

As a result, our revenues grow as our customers buy more solutions from us, and increase the number of registered users utilizing our solutions, and as those users increase their number of transactions on our solution. Q2 has a track record of increasing the monthly recurring revenue of customers from the time they initially sign the contract until the time they renew, as demonstrated by our strong historical revenue retention rates in excess of 100%. I would also like to remind investors that the number of customers we add in any given period will fluctuate based on the size and complexity of their implementations. But we expect an acceleration in registered user growth and users per customer, as Q2 continues to win larger deals.

Our industry is highly regulated. Our customers' backend systems are complex and varied, and the rollout of our solutions directly impacts our customers' relationship with their account holders. As a result, we choose to make an upfront investment in implementations that drive long-term customer relationships. This results in new customer implementations being a headwind to gross margin, as we expense approximately 60% of the costs immediately, while the corresponding revenue is recognized over the life of the contract.

Therefore, the gross margin impact of implementation is negative in the first year, but should normalize in later years. However, cash impact is less negative, as we typically collect cash for the implementation and the initial 3 to 6 months of subscription revenue when a contract is signed.

During 2013, Q2 increased its services pricing. Because services revenue is recognized over the term of the contract rather than upfront when the services are performed, gross margin expansion from this price increase will occur naturally over time, as higher-margin service contracts begin displacing older, lower-margin service contracts. In addition, we believe gross margins will improve as the revenue from high-margin subscription revenue expansion within our installed base increases as a percentage of our total revenue, and we begin to gain efficiencies of scale and leverage from our data center and services infrastructure investments.

Now let me turn to our results for this quarter. As Matt mentioned, our total revenue increased 31% year-over-year, growing to $16.8 million from $12.8 million a year ago. The higher revenue was generated from the growth in the number of customers and the number of registered users on our platform. This growth was derived mostly from the addition of new customers, strong retention, growth of existing customers, and the addition of registered users from new installed customers. In addition, we experienced growth in the number of transactions made using our solutions.

As we continue to add new users, we expect a corresponding increase in the number of transactions made using our solutions. Ultimately, we expect subscription revenue to grow faster than transaction revenue, and transaction revenue to decline as a percentage of our total revenue, as we continue to drive incremental subscription revenue from those same users through sales of additional products and services.

Transaction revenue represented approximately 24% of our total first-quarter revenue, down from 26% a year ago. As we turn to gross margin and operating expenses, please note that unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis. Our Q1 gross margin of 40.1% in Q1, up 230 basis points from the prior quarter, if you exclude stock-based compensation and the $1.1 million one-time charge taken in Q4 of last year for path license usage.

This improvement is due to a combination of organic growth in registered users within our installed base, and the impact we are seeing from the price increases implemented in 2013. We expect quarterly fluctuations in gross margin. However, we are committed to delivering consistent annual improvements in gross margin, as we progress toward our long-term target of 60-plus-percent.

Turning to operating expenses, we continue to make investments to support our rapid growth. Our total operating expenses were $11.2 million, up 60% from one year ago and up 5% quarter-over-quarter. Sales and marketing expenses were $5.3 million, up 77% year-over-year and 10% sequentially. The investments made in sales that Matt discussed earlier were major drivers of the year-over-year increase. We plan to continue to invest in the sales team to support our continued topline growth, and in marketing activities to promote brand awareness and drive continued demand generation.

Research and development spending was $2.6 million, up 45% year-over-year and consistent with the Q4 spending levels. The higher R&D spending reflects increased investment in headcount to support enhancement to our existing platforms as well as new product development. We plan to continue to hire developers, and invest in new and innovative products, and continual improvement of our platform security.

General and Administrative expenses were up 48% year-over-year, but essentially flat from Q4 at $3.2 million. We added G&A headcount in 2013 in preparation of becoming a public company, and we'll continue to invest as the business grows and we begin to operate as a public company. However, we expect G&A spending will level off in 2014, and then begin to steadily decline as a percentage of total revenue.

Adjusted EBITDA was negative $3.4 million compared to negative $4.9 million last quarter. We ended the quarter with cash and cash equivalents of $86.7 million, as the Company raised approximately $72.6 million in net proceeds from our initial public offering, which closed on March 25, 2014.

Note that the Company also announced on April 2, 2014 that the underwriters of its IPO exercised their overallotment option in full. As a result, we received an additional $13.8 million of net proceeds early in the second quarter, which is not reflected on our balance sheet at March 31. Our deferred revenue on March 31 was $28.5 million compared to $27.5 million on December 31.

I'd like to take this opportunity to remind you that we bill our customers for their subscription fees on a monthly basis, and therefore, we do not believe it is meaningful to look at deferred revenue as an indicator of our future revenues. Cash flow used in continuing operations for Q1 was negative $4.5 million. We invested $1.8 million in capital expenditures equating to negative free cash flow of $6.3 million. Note that capital expenditures are down year-over-year, as we made investments in a new corporate headquarters and data center capacity in 2013 that are unlikely to repeat in 2014.

Let me wrap up by sharing our second-quarter and full-year 2014 guidance. We forecast second-quarter revenue in the range of $17.9 million to $18.2 million, resulting in full-year revenue in the range of $74 million to $75 million, representing 30% to 32% year-over-year growth. We forecast second-quarter adjusted EBITDA of negative $4 million to negative $3.7 million, and this is due to the impact of our annual Customer Conference on second-quarter operating expenses. We forecast adjusted EBITDA of negative $14.5 million to negative $13.6 million for the full-year 2014.

In summary, we are very happy with our quarterly results. In the future, we will continue to invest in our business to drive revenue growth, as we take advantage of the large opportunity in front of us. And we are committed to balancing that growth with a study annual improvement in margins.

With that, let me turn it back over to Matt for his closing remarks.

Thanks, Jennifer. I'll close by saying we are pleased to deliver strong results in our first quarter as a public company. We feel good about the trajectory of the business. Q2 is in the early innings of a multibillion-dollar market opportunity. And with our experienced leadership team, high retention rates, long-term contracts, and high revenue visibility, we believe the Company is poised to deliver strong topline growth, profitability, and shareholder value over the longer-term.

With that, let me thank you all for joining us on the call. And I will turn it back over to the operator for questions.

(Operator Instructions) Sterling Auty, JPMorgan.

Let's start with on the customer traction side, you closed a couple of larger deals: one bank, one credit union. I'm curious in terms of -- you'd touched upon the IPO impacts; what does the pipeline of discussions look like in some of those larger banks, as compared to, let's say, the end of last year?

Well, it continues to grow. One of the things that you've seen is that with the IPO, the transparency as well as the balance sheet, you're just seeing significantly more conversations. Keep in mind, those take longer to close because they are just larger organizations. But we are carrying a lot of momentum into the space. You know, with the big signing we had last year, we talked about doing two to three deals this year in the Tier 1 space. We feel good about that number. Signing one in the first quarter made life a lot easier. But the reception from the Tier 1 space has been more -- better than we anticipated; let me put it that way.

Okay. And then maybe you can give us a little sense -- you mentioned the SDK, that the one customer that was using that you're replacing, but I wasn't clear which part of the platform they are rolling out first in? Is there a roadmap in terms of what they are going to ultimately adopt?

Yes, let me provide a little clarity on the deal because it's really interesting when you think about how it started, which kind of ties into our story, which is, first, they were looking for a mobile solution. They contacted us. We told the platform story. After they heard the platform story, they changed to look at our retail and mobile solution, our single platform. After they heard our -- saw our small business functionality, the decision came in for them to buy our entire platform for retail, small business, mobile, as well as our risk and fraud analytics, and components of the voice.

And so, this institution is going to roll out retail first, probably early Q1, and then small business in Q3 of next year. And this decision just further validates our story, which is, the platform solution is the right way to go. We are able to replace three different systems within the -- within their financial institution, as well as add a security product that, as we talked about last year, stopped $12 million in fraud.

And so when you think about the doubling of the sales force that we did in 2013, I think you're going to see us, rather than receiving an RFP on mobile, we'll be able to be more proactive in telling this story out there in the marketplace. And I think you're going to see more and more wins like this, as we are able to leverage the more experienced sales team and the broader sales team we have now.

All right. And last question in terms of -- Jennifer, you talked about the services pricing from last year benefiting gross margins as we move forward. Any sense of the pricing dynamics that you saw during the first quarter?

I would say from an economic perspective, the deals that we signed in the first quarter continue to be at or better from an economic perspective than the deals that we signed in 2013. So, I think we are seeing the pricing that we've implemented take hold in the market and we are doing well there.

Fantastic. Thanks, guys. \

Thanks, Sterling.

Thanks, Sterling.

Tom Roderick, Stifel.

So, Matt, I want to follow-up on the first question that Sterling asked around Tier 1's. And I guess a broader question from my standpoint is, is looking at some of the momentum you've had last year and then coming into this year, particularly moving upstream and doing some of these bigger deals, is there any sort of magical catalyst or tipping point taking place in the industry that is encouraging large regionals and large credit unions to reevaluate what they have, perhaps not on the core side, but reevaluate what they've been doing from a piecemeal standpoint on their online strategy? And where does the sort of mobile and the tablet evolution come into play in that discussion? Thanks.

Yes, thanks, Tom. So the experience -- just because they are a larger regional and financial institution doesn't mean they have the wherewithal to buy their own -- to build their own technology. There is only about 50 of them -- 50 of the 13,000 that can build their own platform.

And so what we are seeing is, is that they are feeling the same pain that a $250 million financial institution can feel, which is, the consumers are expecting an experience similar to what they see with Netflix or Apple, which is, it doesn't matter which device you're using; it needs to be pretty and it needs to function consistently on all those devices. They have the same pressure and probably even more from Bank of America, Wells, all the megabanks around, advertising to their customers about use a smartphone to make a payment or take a picture of a check; use your tablet to pay a bill.

And so the pressure from the megabanks pushes down on them. And then they have this technology that was developed sometimes 15 years ago, never contemplated modern design; it never contemplated even the technology that exists today. You know, iPods weren't around when this stuff was built. And then also it doesn't leverage the data and the ability to talk to the other systems.

So, and then to roll into your comment on the mobile, what we're seeing is, is mobile has become an additive -- is becoming additive to users. So we are not losing desktop usage. We are actually gaining usage through mobile and tablet. So we get about five more logins a month off of somebody who uses our mobile system on average than we did before they used it. So they are still using the desktop; they're just using the mobile and the tablet as well.

And so we continue to see -- the thing that held us back there in that area was, it's hard for a highly regulated business to do business with a privately-owned business that didn't have the transparency you have in the publicly traded company. So, $90 million in the balance sheet, plus going through an IPO, has really changed the trajectory of the business in the Tier 1 space.

Great. That's helpful. Jennifer, I wanted to ask you a little bit more about the gross margins. You referenced, even when you strip out the $1.1 million payment in Q4, I think that gross margins were still up over 200 bps quarter-on-quarter. How do you want us to think about the ramp?

The longer-term goal, I think you still said, is 60%; but as it relates to the pacing out of this year, it would seem like that would be pretty aggressive to try and get 200 bps every quarter. Any sort of one-time benefits this quarter, things that you would say temper that sort of expansion on a quarter-to-quarter basis?

Yes, Tom. So, like you mentioned, it is going to fluctuate some on a quarter-to-quarter basis. We still are striving to make consistent annual improvement. We believe we will exit Q4 of 2014 at a gross margin rate higher than that of Q1. But our quarterly improvements throughout the year won't always be at the level that we achieved in Q1.

Q1 had, in our revenue, some acceleration of go-lives where we pulled them forward from Q2. But because the majority of our costs are incurred while you doing the implementation, that really didn't change the cost structure; just added to our gross margins. So, the timing of implementations throughout the year will make it a bit lumpy.

Okay, great. I'll jump back in the queue, but thank you guys.

Thanks, Tom.

Thanks.

Matt Hedberg, RBC Capital Markets.

Thanks for taking my question, guys. And also, thanks for the additional color on the transactional component of your business. It sounds like it's going to continue to decrease as a percentage of overall revenue. But I guess I'm wondering, can you talk a little bit about the minimums clients have in place? And potentially how annual transaction volume grows for a traditional customer?

Yes, thanks, Matt.

Yes. So, our annual transactional volume, it continues to grow. The reason it's going down as a percentage of our total revenue is, as we move upmarket to the larger clients, many of the larger clients have the volumes on their own to be able to negotiate with the bill-pay providers direct. And so they have direct relationships and do not move their bill-pay onto our paper.

But the volumes continue to grow, as well as the increase in registered users. So you'll see us continue to grow on a volume basis; just as a percentage of total, it will go down.

That's great. And then congratulations on the quarter -- 31% growth. I'm wondering what level of conservatism is embedded in your full-year growth rate? I believe it's 30% to 32%. And maybe how should we think about the ramp into the second-half, based on some of the large T1 accounts that were added late last year?

So, let me start with the ramp into the second-half. As Matt mentioned earlier on the call, we really doubled the sales organization in 2013. And because it takes 9 to 12 months for those sales folks to get fully ramped, and then 6 to 9 months for the implementation to occur, and that to begin hitting our topline revenue, we expect a level kind of year-over-year growth rate in Q2 maybe even down slightly, because Q1 was a difficult compare. And Q2 is a pretty easy compare to last year. But you'll see that acceleration in the second-half of the year.

And with regards to the Tier 1's, the average is 6 to 9 months to implementation; the Tier 1's are closer to the nine months. But some can go faster and some can go longer, you know, depending on what happens with that organization and their rollout. And some roll out to their customers in a phased basis. They may roll out only retail first or consumer first, or commercial first. So, they may not bring all their users online at one time.

So, really, the 2014, for any of the Tier 1's we sign this year, will have some small impact possibly late in the year. But it's really 2015 and beyond that will benefit from that revenue.

That's great. And then maybe the last one for me, a quick one. $87 million in cash or roughly $87 million in cash. How do you think about M&A? I don't believe you've done any acquisitions to date, but how should we think about the use of some of that capital?

Yes, we'll be strategic in looking at the opportunities that are out there. We don't anticipate a transformational deal. We would look at things that we could tuck in that would add value that we could integrate into the platform or cross-sell to the existing base. So, we are out looking now and just trying to see what activity is out there. There's a lot of opportunities, but we also want to make sure we execute on a quarterly basis on what we've committed to.

Great. Thanks, guys.

Thanks, Matt.

Terry Tillman, Raymond James.

This is Brian Peterson filling in for Terry. Congrats on the quarter. I just wanted to hit on the customers on the platform this quarter, up 11% sequentially. That was definitely better than what we were looking for. Are there any seasonal tailwinds in the first quarter from that? Or is that kind of the -- at least from a year-over-year growth perspective, are you comfortable with the 30% growth rate you showed in the first quarter?

So, as I mentioned with some of the revenue and gross margin stuff a while ago, we were able to accelerate some of our go-lives from Q2 into Q1. And that resulted in pulling in the registered users associated with those as well. So I wouldn't necessarily expect an 11% quarter-over-quarter growth rate every quarter. It will bounce around, based on the timing of implementations and the size of the customers that we implement in any quarter. But I think we are very comfortable with the 30% range on a year.

Okay, great. And I know that one of your competitors that generally focuses on larger banks has gone through a couple of M&A transactions over the last year. Are you seeing any benefit from a competitive dynamic from that? Or are you mostly competing with point solutions at this point? Thank you.

Thank you. Not exactly sure. There are several that meet the description you described from an acquisition standpoint. So we are competing with -- what we are seeing when that happens is, just confusion on the customer base of what product is going to exist, what product is not going to exist. Directionally, it's hard to tell a story.

So we focus on, we had the chance to start over; we built a new platform. It drives down total cost of ownership, provides a better customer experience, and drives efficiency and gives you the data that you're going to need, because people aren't going to your branches any more. So, that story resonates, as I said earlier, at a Tier 1, Tier 2, Tier 3 financial institution. And we are going to continue to capitalize on the companies that are maybe focusing on things other than digital banking. Thanks.

Thank you.

Richard Davis, Canaccord.

So there's been a lot of Q&A on the Tier 1 stuff, and I know that's easy for us analysts to kind of focus on. I just want to make sure that I understand the strategy in the sense of -- you guys are still focused predominantly on Tier 2 and 3. In other words, you still feel there's a lot of opportunity there; you haven't run the table, anywhere near running the table on that layer, or -- and/or you're not really trying to pivot up and just be a Tier 1 bank automation firm, right? I just want to make sure I'm right on that part.

You are absolutely correct, Richard. The majority of our sales force focuses on Tier 3 and Tier 2. And as I said earlier in the call, we are looking at doing two to three deals. I think maybe some of the questions are coming because when we win big deals, there is a network affect within their geographic area or even coast-to-coast to where banks that are in the Tier 2 and Tier 3 say, oh, this bank uses your technology, or this credit union uses your technology; we'll sign up with you as well.

And so, it's part of just building a company, as we continue to build and grow at 30-plus-percent. So, there is -- the majority of the sales organization focuses on the Tier 2 and Tier 3, and we are growing in the Tier 1 space. But you'll see the majority of our bookings come from that space and from our existing customers.

Got it, got it. And then a question on the gross margins. At scale, when you get to kind of that 50% gross margin goal -- and I know you don't kind of break out services from description -- would it be roughly kind of 60%/40% kind of subscription services at that point? Is that kind of notionally, at least, in our heads, that would be a logical split? In other words, that would imply a 70% margin for your subscription stuff and 20% for your ProServ; is that about right?

I'm sorry. You kind of cut out there at the end, but I think if you're talking 60%/40% split between gross margin and services, with 60% being subscription and 40% being services, is that what you're driving at?

Yes. Yes, yes.

Yes. I would say that's correct. And the 60% on subscriptions, remember, is pulled down. Our subscriptions for our internal product would be at a higher rate than that, with the third-party products that we only get about a 40% margin on, pulling that down, dragging that down.

Got it. Thank you very much.

Thanks, Richard.

Michael Huang, Needham.

Congrats on being a public company. Just a couple of questions for you guys. So, first of all, just wanted to clarify, Matt. I think you'd -- so you had mentioned in your remarks that you were seeing five kind of more additional logins a month from the mobile user, and just wanted to clarify. I mean, does that impact pricing or transaction volume in any way? Or is this primarily just a benefit on customer sat and retention rates?

Well, more users on the system help. But no, it doesn't -- the number of logins don't impact revenue.

Okay. Okay. And then you had talked about kind of -- or you'd touched on the Client Conference. I was wondering if you could kind of share a little color around that? Like, what were the kind of the key one or two takeaways from that Client Conference? And how does this event typically drive sale cycles and bookings? I think you had mentioned that there were some prospect there.

Yes. Thanks for asking about it. It's -- we did it three weeks after the IPO, which I don't recommend to the common folks. But it was -- we had about 400 customers and prospects there. It's a time for us to spend -- the majority of the time, 95% of the people there are customers -- and it's a time for us to tell them about our direction, kind of our accomplishments, but also to get time with them to figure out where we are going, for them to figure out where we are going; but, more importantly, where they want to go.

And so we were able to connect to the customers, talk with them, and then we had prospects that were there as well. There was a lot of buzz around -- they take a great deal of pride in our success, because we've been doing this for almost 10 years, and a lot of these customers have been around for that time. So, there was a lot of energy around the IPO.

I think a lot of people feel like, okay, I don't have to -- this company is going to be here for a long time now. And so we have $90 million on the balance sheet. And then, also, one of the customers came up to me and said, it's amazing that they go to different company conferences, and our focus on digital devices, analytics and the security is second-to-none.

You get some of these people that are all over the place and focused and not focused and scattered. And our focus on what we do is second-to-none in this space. And I think it really helps because, in a vertical market, they are all of our references. And whether they are credit unions or banks, they've helped grow our business. So, there was a ton of energy. It was very positive. And we hope to close the majority of the prospects that were there here in 2014.

Got you. And could you share kind of what the titles of those attendees that were there? I mean, what -- who was -- who is coming to this conference?

So, the majority of the people that came were probably -- were in the -- everywhere from CIOs to AVPs. But the majority of them are decisionmakers that are over the eBanking channel; so, the digital banking channel. It varies. But the majority of them are -- you know, it's not exactly cheap, as they told me. So you get some senior-level people there.

Okay, great. And then last question for you. So, obviously, we've seen some turbines out there around valuations in our SaaS universe. And was wondering -- are you guys seeing anything at all kind of in your business or business environment competitively, et cetera, that you're increasingly cautious about them? And obviously, you turned in a great quarter, and it seems like you're pretty upbeat in tone. But I just want to give you the opportunity to talk about whether or not you're seeing anything that gives you pause.

No. We are extremely optimistic about the opportunity. Our customers are doing well. They continue to pick up market share from the larger financial institutions, as they continue to move out of the -- they closed down their branches. But the fundamentals of our business are still the same.

Banks have -- their customers require that you have technology that meets modern needs. Bank of America, Wells and Chase are all advertising that this is how they deliver their services. And our customers don't have the technical wherewithal to build it on their own, and so they have to go to somebody to build it. And we're the only one that was able to start with a clean slate and to build any scale around this.

So, the fundamentals of this business, our customers are very healthy. And we'd be -- are just as optimistic as we were 45 days ago. We are not focused on what's going on, on a day-to-day basis with the stock price.

Outstanding. Thanks, guys.

Thanks.

Thanks, Mike.

And we have no further questions at this time. I'll turn the call back to our presenters for closing remarks.

Thank you very much. We are excited about the trajectory of this business. We believe our single platform is at the center of helping regional and community banks and credit unions change their business. Helping us to strengthen -- helping to strengthen communities by building stronger community financial institutions is what this business is all about.

We thank you. And we look forward to talking to you in the near future.

And this concludes today's conference call. You may now disconnect.