Q2 Holdings Inc (QTWO) 2014 Q2 法說會逐字稿

Good afternoon, my name is Heather and I will be your conference operator today. At this time I would like to welcome everyone to the Q2 Holdings second-quarter 2014 results conference call. (Operator Instructions). Thank you. Mr. Bob Gujavarty, Vice President of Investor Relations, you may begin your conference.

Good afternoon and welcome to Q2 Holdings second-quarter 2014 earnings call for the period ending June 30, 2014. I am Bob Gujavarty, Vice President of Investor Relations, and with me today on the call are 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 third quarter and full year 2014; our growth opportunities and expectations; our long-term financial targets; areas of strategic focus in investment, including our key corporate initiatives; our market opportunities; anticipated demand for our products; the benefits of our products, including our new 4.0 release, and the strategic advantages they offer; our anticipated timing and return on our prior investments, including our data center upgrade and sales force expansion; our anticipated benefits and costs of implementing larger customers; future product improvements and functionality; our ability to implement new customers on schedule; our expectations regarding growth in number of users and changes in revenue mix; and the resulting impact on gross margins 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 the second quarter of 2014 which we anticipate filing with the SEC on or before August 14, 2014, and the risk factors described in our final prospectus dated March 19, 2014.

Should any of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our 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 including 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 the non-GAAP measures are more representative of how we internally measure the business. And they are reconciled to GAAP in the tables attached to our press release available on our Investor Relations website.

The nonrevenue financial measures we will discuss today are non-GAAP unless we state the measure as 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 will turn the call over to Matt Flake.

Thanks, Bob, and thanks to all of you for joining us today for our second earnings call as a publicly traded company. During today's call I will provide highlights from our second-quarter 2014 results, including a few key sales wins 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 the third quarter and full-year 2014.

Q2 Holdings is pleased to announce strong results for the second quarter. During the quarter we generated total revenue of $19.2 million, exceeding the top end of our guidance of $18.2 million and up 36% year over year.

In addition, we are pleased to announce that we ended the second quarter with a total of 3.9 million registered end-users on our platform, up 36% year over year. We saw great sales success in the quarter with above plan execution in all of our target markets.

The majority of second-quarter wins were institutions with $5 billion in assets and below. We commonly refer to these segments as Tier 2 and Tier 3 institutions. This is where the majority of our sales team is focused and we are experiencing continued momentum with banks and credit unions in these segments.

We also added two more top 100 banks, helping us achieve the top end of our goal to win three Tier 1 deals in 2014. Tier 1 institutions typically have a larger number of account holders and potential registered users. And because Q2's growth is driven in large part by more registered users on the platform, we believe adding larger customers will continue to drive strong revenue growth and, over the long-term, margin expansion.

These institutions help accelerate the innovation of our products, helping customers of all sizes deliver differentiated products to their account holders. We believe winning additional Tier 1 contracts directly translates into more sales success in Tiers 2 and 3 by further reinforcing the scalability of the Q2 platform.

We are excited about the continued performance of our experienced sales team who are actively targeting and partnering with the regional influencers aligned with our mission to deliver innovative technology solutions.

Now I'd like to profile a few of our key second-quarter wins. These wins will provide a high level view of why Q2's solutions are playing a central role in the transformation underway in the regional and Community Banking space.

The second quarter saw a number of key Tier 2 additions, one of those, a credit union in the Northwest, chose Q2 to replace their core provider's online banking solution provided at a lower price than the Q2 solution. This credit union chose Q2's single platform for its ability to help drive a consistent branded experience to their members regardless of device.

This customer is focused on growing its commercial business accounts and believes Q2's integrated commercial functionality and multilayered security solutions will help them deliver on their growth strategy. We continue to see our platform winning with credit unions for its combination of commercial functionality and attention to user experience.

As I mentioned earlier, we also added two Tier 1 banks in the second quarter, one in the southeast, the other in the Southwest. Both of these institutions have over $10 billion in assets and have a large number of retail and commercial account holders.

In these wins the banks purchased the retail and commercial functionality of our platform, which we believe demonstrates the breadth and depth we have been able to achieve with our single platform architecture and its ability to provide a comprehensive solution for these banks' virtual delivery channels.

We believe our platform's ability to help customers adapt to new technologies is playing a central role in helping banks of this size remain competitive, grow market share and drive operational efficiencies that are difficult to achieve with disparate systems.

These wins were against two of our traditional competitors in the space, point systems providers and core providers. We are also competing favorably against payment processing companies and we are seeing banks and credit unions continue to rely on us to drive innovative design and functionality to their account holders.

In addition to our sales success I'm proud to announce that we have successfully released version 4.0 of our platform. This release supports an enhanced user experience across online, mobile and tablet. It also delivers full mobile commercial banking functionality specifically designed to help our customers attract, retain and grow their business accounts.

Announcing general availability of this product ahead of schedule is another example of operational execution from our product, development and delivery teams. We believe this release reinforces our reputation as an innovation driven company and lays the foundation for our future product direction which includes more advanced commercial and treasury functionality.

The success of our second quarter was also marked by continued growth in a number of registered end-users on our platform. We exited the quarter with 3.9 million registered end-users representing a 36% increase over the prior year. While we expect end-user growth to fluctuate from quarter to quarter, we are pleased with the continued operational execution of our delivery team.

Finally, we are making significant strides in moving Umpqua Bank, one of the premier financial institutions in the country, live on the Q2 platform. They have signed off on a product and we are recognizing revenue as of the second quarter. We believe the progress we've made with Umpqua Bank further demonstrates our execution in bringing customers live on the platform on or ahead of schedule.

As our momentum continues we will maintain our focus on driving three key corporate initiatives, expanding our sales reach and increasing sales productivity to continue acquiring new customers and cross-selling to existing customers, scaling our business to continue providing world-class customer experience while aligning with our goals improving gross margins and building new, industry defining products, a hallmark of our success.

We are proud of the second-quarter results and excited about the opportunity ahead of us. Our revenue model is characterized by high revenue retention rates, long-term contracts and high revenue visibility. And we are focused on top-line revenue growth as well as margin improvement.

The fundamentals of our business remain the same and we believe we are extremely well-positioned to pursue our growth strategy moving forward. With that I would like to hand the call over to Jennifer to discuss our financial performance.

Thanks, Matt. We are pleased to have delivered a strong second quarter with results that were above our expectations for revenue and adjusted EBITDA. I will quickly review our results for the second quarter before finishing with updated guidance for the third quarter and full year 2014.

Total revenue for the second quarter was $19.2 million, an increase of 36% year over year and above the high end of our guidance of $18.2 million. The revenue overachievement in the second quarter was a result of the addition of registered users from new and existing customers, including Umpqua Bank which we brought life ahead of schedule, and approximately $400,000 of one-time revenue related to the transition of a reseller agreement to a referral partner relationship.

We price our solutions based on the number of solutions purchase 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 they make using our solutions.

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.

While we continue to invest in improvements in our implementation processes and infrastructure to drive gross margin improvement, gross margins will vary from period to period depending on factors specific to each period, such is the amount of implementation services required to deploy our products relative to total contract value, timing of new customer go live and the mix of internal and third-party product revenue.

Non-GAAP gross margin rose to 44.2%, up 410 basis points from the prior quarter. Accelerated go lives and higher than expected one-time items combined contributed to roughly 160 basis points of the sequential increase.

I would like to remind investors that given the disparity between subscription and services gross margin, the mix of revenue has significant implications on gross margins. Our subscription revenue generates higher gross margins than services revenue.

Tier 1 customers typically require larger service engagement and drive a higher mix of services revenue relative to the smaller Tier 2 customers. The greater mix of services revenue generated by Tier 1 deals will be a headwind to gross margin improvement in the short term. However, over the long-term we believe the higher subscription revenue from Tier 1 customers will lead to long-term gross margin expansion.

Additionally, our accounting of services revenue and expense acts as a headwind to gross margin improvement. We expense approximately 60% of services costs when performed, while the corresponding revenue is recognized over the initial term of the contract.

Therefore the GAAP gross margin impact of new customer implementations is negative in the first year but should normalize in later years. Remember that the cash impact is less negative as we typically collect cash for the implementation upfront when the services are performed.

We expect quarterly fluctuations in gross margin driven by changes in mix as well as the number of customers who go live in the period. But we remain committed to delivering consistent annual improvements in gross margin as we progress towards our long-term target of 60% plus.

Over the long-term we believe gross margins will improve as the revenue from high margin subscription revenue 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 investment.

Turning to operating expenses, we continue to make investments to support our rapid growth. Our total operating expenses were $12 million, up 37% from one year ago and up 7% quarter over quarter. Sales and marketing expenses were $5.8 million, up 43% year over year and 9% sequentially.

The year-over-year increase is driven primarily by the investment in sales headcount we made in 2013. The sequential increase was due to our customer conference which occurred in April of this year.

Research and development spending was $2.7 million, up 28% year over year and consistent with Q1 spending levels. The increased R&D spending year over year reflects increased investment in headcount to support enhancements to our existing platform as well as new product development. We plan to continue to invest in new and innovative products and the continual improvement of our platform.

General and administrative expenses were up 33% year over year and up 8% from the prior quarter at $3.4 million. We added G&A headcount in 2013 in preparation for becoming a public company and will continue to invest as the business grows and we operate as a public company. The sequential increase was due largely to higher spending on public company expenses. We expect G&A spending will level off in late 2014 and then begin to steadily decline as a percentage of revenue.

Adjusted EBITDA was negative $2.5 million, better than the high end of guidance of negative $3.7 million and an improvement from negative $3.4 million in the previous quarter. The better than expected results were driven primarily by the higher than anticipated revenue and gross margin.

We ended the quarter with cash and cash equivalents of $94.9 million, as the Company raised approximately $13.7 million in net proceeds from the exercise of the IPO overallotment option and generated $384,000 in cash flow from operations. This was partially offset by $638,000 of capital expenditures and a $4.2 million pay down on our line of credit.

Capital expenditures are down year over year as we made higher investments in a new corporate headquarters facility and data center capacity in 2013. Our deferred revenue on June 30 was $32.3 million, up from $28.5 million on March 31.

I'd like 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 future revenue.

The increase in deferred revenue reflects customer deposits collected during the quarter partially offset by revenue recognized during the quarter for services engagement. These advance payments were also a primary driver of the positive operating cash flow in the quarter.

Let me wrap up by sharing our third-quarter and full-year 2014 guidance. We forecast third-quarter revenue in the range of $19.5 million to $19.8 million and we are raising our full-year revenue guidance to a range of $76.2 million to $76.8 million representing a 34% to 35% year-over-year growth rate.

We forecast third-quarter adjusted EBITDA of negative $3.4 million to negative $3.1 million and for the year negative $12.4 million to negative $12 million.

In summary, we believe the strong second-quarter results reflect our commitment to growing revenue and improving gross margins. Matt alluded to accelerating demand from Tier 1 customers and to support this demand we will incur incremental services expense in the second half of 2014.

This will moderate the pace of gross margin improvements in the near term, but we remain on target to deliver annual improvements in gross margin and believe the Company can deliver operating margin leverage as we continue to target annual revenue growth of 30% plus.

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

Thanks, Jennifer. I will close by saying we are pleased to deliver strong second-quarter results. We have been able to overachieve on our guidance for two quarters in a row and I'm encouraged by the progress of the business.

Q2 is in the early innings of a multibillion-dollar market opportunity and with our experienced team, high retention rates, long-term contracts and high revenue visibility we believe the Company is poised to drive strong top-line 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 -- I will now turn it back over to the operator for questions.

(Operator Instructions). Sterling Auty, JPMorgan.

Let's hit a couple areas and then I will jump back into the queue. Let's start with the gross margin. I wasn't clear on -- let's do the one-time item first. What exactly was the one-time in revenue that helped the gross margin?

We had approximately $400,000 of revenue from items that we recorded in connection with the transition of a reseller agreement that we had to a referral partner relationship.

Okay. And once they become a referral partner what does that actually mean?

So, now instead of them actually reselling our product, they will be working with us and referring customers to us and (technical difficulty).

Whoops, sorry, I don't know if it was my line or everybody's line, you cut out there, Jennifer.

Yes, sorry, Sterling. So now instead of the reseller actually selling to the customer on their paper, we will be taking those direct and they will receive a referral payment for those customers.

Okay. And the $400,000 that you got, that actually went into revenue or that went just against cost of revenue?

That actually went into revenue. That was forfeited deposits on a couple of projects as a result of the transition from the reseller agreement to the referral.

Okay, all right, great. I think we can back into then the go live. Just a housekeeping one, the Umpqua users, they are counted in the 3.9 million or -- and I would imagine since they just went live that is kind of the bare minimum?

That is exactly right. It is a small number. They just went live in this quarter, so you will see that number begin to grow as they roll it out and register more end-users on the new products.

And, Matt, that kind of brings me to -- so what are you seeing out of your customer base now in terms of doing marketing, advertising programs or other things to drive further adoption?

Well, we have been driving campaigns for our customers to drive everything from more e-statements, bill payments, online banking, small business. And so obviously we are happy with the results of 3.9 million end-users to add that many in a quarter without many of them coming from Umpqua.

So I think you are seeing the customers lean on us a little bit more to help drive marketing programs and the advertising goes along with that. So we are obviously happy with the 400,000 end users we had in the quarter.

All right, last question. So you hit the Tier 1 bank goal that you wanted for the year, but how does that pipeline look? And what should our expectations be on the possibility of seeing further closures in 2014 versus what you would shoot for in 2015?

Your patience is amazing, Sterling. I thought that would be your first question. So, we have been -- the word expectations is good. We have been committed to making sure we set the appropriate expectations and we said we would do three in 2014, we hit that number, we executed, we hit it early. So at this point obviously there is a tremendous amount of momentum not only in Tier 1 but Tier 2 -- Tier 2 and tier 3 as well.

So at this point we are going to not add any more to 2014, we are going to keep it at 3 just because of the sales cycle and the timing of this deal takes a little longer. But we will sign more deals, it is just a matter of I don't want to set an expectation for 2014.

Got it. Thank you, guys.

Tom Roderick, Stifel.

Matt Van Vliet on for Tom. Great quarter, guys. Thanks for taking my question. In terms of the Umpqua go live being a little early, that first question, what drove that and kind of how early or where were you expecting that before to then go live this quarter?

We anticipated Umpqua coming on in the beginning of the fourth quarter of this year. What drove it was just solid execution by our implementation team and their implementation team. If you think about it, we signed that contract a year ago and they made an acquisition, doubled the size of the organization. So everybody worked really hard to get there.

So it was just a function of both teams focused, working well together. They are a great partner. So we just executed on the plan and worked really well. And so we have got more work to do get them live, but we (inaudible) all that users on there, but we are really happy with the results.

And then is that something that is fairly unique there or can you use that as part of a sales pitch moving forward for larger organizations that you deliver -- not only deliver early but are a great partner to work with? Or is this just kind of a one-off situation that you extended out the time for the factors you mentioned whether acquisition and such that maybe this isn't the best case to use moving forward?

No, it is a great case to use. To execute on a deal this size our first Tier 1 to hit them on time or a little bit ahead of schedule as well as to be able to use them as a reference as we continue to grow the Tier 1 space, it is fabulous. It also works for the Tier 2 and the tier 3.

And we are doing a great job executing on the Tier 2 and the tier 3 as well. When you think about adding 400,000 end users in a quarter, there was a lot of delivery that took place. So it is a positive -- Umpqua is a big name in the industry and we are continuing to see the momentum in the Tier 1 space come from that.

And then people -- some people were waiting to see the progress of that I believe in the market. So we think you are just going to see more momentum after getting Umpqua live.

And then in terms of the pipeline, so you are not raising the Tier 1 expectations for obvious reasons, those deals take quite a while to finally get over the goal line. But how about other larger Tier 2's and as we've seen in the past, just because you sign the Tier 1 that doesn't mean that it's their largest deal out there in terms of contract value.

Are you seeing any Tier 2's, whether it be on the bank or the credit union side, that can start to even kind of push into maybe what we would characterize as more of a Tier 1 size contract and kind of what you are expecting the rest of the year for those types of deals?

Yes. So let me just back up and make sure that we are all on the same page. Last year we doubled the sales force. It takes a sales rep 9 to 12 months to become productive. And then it takes 6 to 9 months, especially in the Tier 2, before it hits the top line.

So we raised our annual guidance in this quarter and I think it takes some time to get those live. But we see a tremendous amount of traction in the Tier 2 space with our story, we had a solid quarter and with our reference ability of our customers, our data center.

We do a really good job of keeping it up and running and for some reason some of the competitors struggle with that. We pick up the phone when you call. So there is going to be more opportunities in the Tier 2 space. We feel very good about the outlook for the rest of the year as well as 2015.

All right, great, thank you, guys.

Matt Hedberg, RBC Capital Markets.

Congrats on the quarter as well. I guess following up on the last question you mentioned some of the sales productivity -- or some of the sales force doubling last year. I guess I'm curious; it looks to me like even with the ramp it is probably starting to pay dividends with the 400,000 users you added this quarter.

Is there a way to quantify the productivity gains you are seeing sort of on a preliminary basis? And I guess I am curious, what are you thinking for the capacity plans in the second half of the year?

Capacity in the sales organization?

Correct.

So we doubled in 2013 and we are not -- we are adding more commensurate with the growth that we are talking about 30% plus from a sales organization perspective, that includes relationship managers as well as -- net direct sales reps.

So I think what we are focusing on is increasing productivity out of each sales rep, leveraging the marketing, the brand recognition in the industry and then also trying to drive -- we continue to -- we want to monetize our innovation. So we are an innovative company, we intend to get paid for it.

So you are going to continue to see us invest in the sales organization, but the leadership in that organization is doing a great job of driving more productivity at them. So we are getting -- we continue to get more of that and our win rates remain the same.

That is great. And with the release of 4.0 of your virtual banking platform I am curious -- when you think about cross-selling, I believe most of your customers use maybe between 8 and 10 of your SKUs. How should we think about that progressing with some of these new mods -- anti-fraud, analytics, mobile, things of that nature?

We continually cross sell -- as you mentioned, we are underpenetrated. We have more than 30 SKUs of products and our average customers have 9 to 10. So as we continue to innovate we will continue to cross sell those products.

I am glad you mentioned 4.0 because I would say that what you are going to see with 4.0 is that is part of the value that we deliver to our customers and is that we will out new technology. And I think you are going to see it have an impact across the Company in several ways.

Number one, the pace in which we innovate seems to be significantly faster than what the competition can innovate. And when I say innovate I mean actually deliver the product into the ground and have people using it. We have referenceable customers on our 4.0 right now.

And so, you are going to see with net new customers the ability for us to continue to win and add value to those transactions. With existing customers it is about driving more utilization of the product. As the product gets broader more users get on the system, we get paid more money.

And lastly, anytime you roll out a new release of software there is operating efficiency that comes with it. You just get better with new releases. So you are going to see us continue to drive long-term operating margins up by innovating on our platform. So there is a tremendous opportunity for us both on the net new side, the cross side and within the Company to drive efficiencies.

That's great. And then maybe one more, Matt. Texas is clearly your most mature market. I think you are maybe about 18% penetrated or high teens. And one of the Tier 1's was in the Southwest; the other was in the Southeast it sounds like. Can you talk about some of the other fast-growing regions, what is driving that growth and perhaps could we see some penetration rate similar to Texas?

Yes, Matt, I would say that obviously Texas, because of Hank starting here and me being here for a long time, we have got a solid penetration rate. That serves as a model for us where we think we can do in other markets. The way we have grown the sales organization right now, they are coming from all over, we are getting them in the Midwest, the Southeast the Northwest and we signed that big credit union in the Northwest this quarter.

So we are going to -- as we drive more sales reps up and they drive their productivity up I think you are going to see certain regions continue to grow. We are only 3% penetrated -- there is 13,000 of these financial institutions and we have less than 400 of them. So we are only 3% penetrated in the market, it is early innings; there is a tremendous opportunity ahead of us.

That is great. Thanks a lot, guys.

Terry Tillman, Raymond James.

Hi, this is Brian Peterson in for Terry. Just wanted to follow up on some of the large deal commentary that was impressive this quarter. Can you give us a typical implementation cycle? Would that be 12 months, maybe 18 months? So the two wins this quarter and maybe the win last quarter, when would you actually expect that to come into the P&L?

It is hard to -- there is not really a typical one especially when we are new in the space. I would say that each one of them has their own characteristics and then you have things like Umpqua where they double the size of the financial institution in the middle of the project.

I would say that the two we signed this quarter are first half of 2015. We anticipate them going live in some staggered approach similar to Umpqua and the one we signed in the first quarter. We signed it right at the end of the quarter as a similar timeline of first half of 2015.

Okay, that is helpful. And then one more, could you give us a sense of if you look at your pipeline and maybe how many Tier 1 banks are in that pipeline versus let's call it 6 to 12 months ago, are you seeing that increase or is it down a little bit because you have closed some good opportunities or is it about stable?

It is increasing.

Okay, good to hear. Thanks, guys.

Richard Davis, Canaccord.

I was thinking, on the transaction side of the business, broadly speaking, how do you think about, A, the mix and, B, are there puts and takes with your customers? Because they may go like, well, I don't know if I want to have -- I would rather pay a higher fixed cost versus a per transaction or does that dissuade them from doing that? I am just wondering how you think about that that mix of business and stuff. Thanks.

Sure, Richard, I'll take that one. So our transactional revenue in Q2 was 23% of our total revenue and that is down from 24% in Q2 of last year. And I think while you won't see it go down dramatically I think you will continue to see it trend down. And one of those reasons is as we sell to more of the high Tier 2 and the Tier 1 accounts, those accounts are large enough that they have their own direct relationships with bill pay providers because they process the volume that they can get good pricing.

So I can tell you that the tier 3 -- or Tier 1 deals that we signed this year, all three of them, bill pay is not on our paper on any of those. So we will continue to see the mix of bill pay decrease because of that I believe.

From a pricing standpoint, we don't price that any differently than we do the rest of it. We have some small number of transactions that are included in the minimum subscription fee and then everything over that is transactional pricing. We will negotiate the transactional pricing with the larger customers obviously who have more volume. But it is not any different than anything else.

Got it. And then the follow-up would just be with regard to kind of in-house services versus partner deployments, I mean you are still early days, how do you kind of think -- do you see that evolving to more of a partner ecosystem or is it more when you go to the higher end guys, the Tier 1 folks, just how does that play out over the next few years? Thanks.

Yes, I think that we are beginning to see with the over execution in the Tier 1 space, I think we are going to find systems integrators that are going to come around sooner than we anticipated. I think we had talked about 2015 or 2016. I am pretty certain we are going to start to work with some systems integrators in 2015 for certain.

One quick last question. Did you say how many customers you have in total? I may have missed it. Because I think it was like 370 -- was at 374 at the end of -- when we last heard it? I can't remember. You said below 400; I just couldn't remember --.

No, the last time I was allowed to say it I said it to Jim Cramer and it was 350.

350, there you go.

I got in trouble for that.

There you go, all right, cool.

We will provide the number of installed users on an annual basis.

Got it, got it, cool. Okay, thanks so much.

(Operator Instructions). Michael Huang, Needham & Company.

Just a few questions for you. I was going to follow up on the business rational for the transition of the reseller to a referral relationship. Could you talk about kind of what the key driver was behind this and ultimately what is the net benefit to the business as a result of making that transition?

Yes it was a partnership we had signed -- a reseller arrangement we had signed in 2008 and our eyes were probably a little bigger than our stomach in that case in both -- from both partnerships. It is a great partnership; we've actually generated quite a few deals this year on it.

And it is just a matter of -- at the time that we signed it I think we both had -- we were pretty ambitious about how we could do that. And I think we just weren't -- they, in particular had some changes that went on in their Company. And so it's -- we are still great friends, we still work together, we resell their stuff and they refer our stuff.

So it is -- it was a mature decision on the business, the Board, everybody made it and we still work very well with them. And the economics work out better for us. You get a much cleaner sale by a sales rep that is trained in our organization on how the product works. And then your deployments go much smoother and your customers [set] ultimately is smoother. So we may go back to those one of these days, but right now with the momentum we have we are pretty happy with our direct sales organization.

Got you, okay. And I am not sure if I -- so I'm just time to jog my memory here. So is this the first quarter in the history where you guys have added two Tier 1's? And I guess as we are thinking about how registered users come online sometime in the first half of 2015, I mean are we going to see a notable stair step sequentially as a result of these users coming online assuming a fairly good execution on the deployment end?

You will see an increase in users, the two that we signed in this quarter have larger users, but the one we signed in the first quarter is not really a large user, it is a large commercial bank and so they don't have as many users. So all of them are going to be different. But you are going to see the number is going to get bigger as well.

We started the year at 3.1 million and we are at 3.9 million already. So continued execution on the Tier 2 side and the tier 3 is going to add users, more utilization of the product is going to add users and these guys are going to add users. So it will continue to go up.

Got you, okay. And then just on Umpqua, so I was wondering if you are willing to share kind of when in the quarter Umpqua went live. Was a towards the tail end of Q2 or was it towards the beginning and ultimately how do registered users typically ramp when a large Tier 1 goes live? Is it linearly or do you hit a point in time where user adoption really ramps?

Let me comment on that and then you can talk about -- Jennifer can talk about the revenues. So Umpqua has a particular tactic that they are using to move users over which is going to be through technology, it is going to be one at a time. And so you will see it gradually increase.

You are not going to see a big jump in the third quarter off of those users I don't believe. But you will see them by the end of the year have a majority of their customers on there. And then the Sterling conversion will happen sometime in the second half -- first half of 2015. Jennifer, you can comment on the revenue. I don't --.

Yes, we actually did accelerate and take them live right at the beginning of the quarter. So we have practically a full quarter's worth of revenue from them.

Great, thanks so much. Appreciate it, guys.

There are no further questions at this time. I will now turn the call back over to our presenters for any closing remarks.

Thank you very much for joining the call, we appreciate it. We look forward to talking to you next quarter.

This concludes today's conference call. You may now disconnect.