Q2 Holdings Inc (QTWO) 2016 Q2 法說會逐字稿

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

Welcome to the Q2 Holdings results conference call for the second quarter ended June 30, 2016. I'm Bob Gujavarty, Vice President of Investor Relations and with me today on the call are Matt Flake, our 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 yesterday afternoon. If you have not, it is available on the Investor Relations section of our website.

Let me also highlight our participation in several investor events this quarter. We will be attending the Pacific Crest Global Technology Forum in Vail and the Canaccord Genuity Growth Conference in Boston.

Before beginning, we must caution you that today's remarks in this discussion, including statements made during the question-and-answer session, contain forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties, which could cause actual results to differ from results implied by these or other forward-looking statements.

Also, these statements are based solely on present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission and the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward-looking statements.

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 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. Since we expect our future stock-based compensation expense to have a significant impact on our future GAAP financial results, a reconciliation is not available on a forward-looking basis without unreasonable effort. With that, thank you for joining us and I will turn the call over to Matt.

Thanks, Bob, and thanks to all of you for joining us. On today's call, I'm going to share some business highlights from the second quarter before handing it over to Jennifer to take you through our financial results in more detail.

I'm pleased to announce another strong quarter of revenue performance. In the second quarter, we generated total revenue of $36 million, up 7% sequentially and 37% year-over-year. We also continued our end-user growth in the second quarter, adding more than 800,000 users bringing us to 7.6 million users at quarter-end. Our end-user additions represent a 13% growth quarter-over-quarter and 35% year-over-year.

On our last call, we took the opportunity to introduce several products that we announced at CONNECT, our annual client conference in May. I'd like to start today's call by providing an update specifically on our new corporate banking suite as we made initial headway in getting this product into the market during the quarter.

The Q2 corporate product includes a set of features that addresses the needs of more complex commercial accounts. We believe this new offering is highly differentiated in the marketplace and one that can enhance our sales activity both on the net new side and through cross sales to existing customers.

We saw this play out in the second quarter where we had success both on the net new side by signing a top 50 credit union and on the cross sales side by signing Trustmark National, a $13 billion bank. This cross-sale win is important for two reasons.

First, I view it as an early validation of our new corporate offerings. Second, I believe it provides a great example of our expanded opportunity in the tier 1 space as we scale from retail and small business to the corporate market. Trustmark initially signed with us in 2014 for retail and small business and after purchasing Q2 Corporate will soon offer the full breadth of the Q2 platform.

In addition to seeing early traction with our corporate banking solution on the sales side, the industry is taking note as well. I'm proud to announce that during the second quarter our corporate banking suite was recognized with the Best User Experience and Up-And-Comer Awards by Aite Group, a global research and advisory firm and consultant to financial institutions across the country.

On the sales side, I'm pleased to say that we've built on our credit union's success from the first quarter signing three $1 billion plus credit unions in the quarter, one of which is the top 50 credit union I referenced earlier on the call.

While I'm pleased with both the cross-sales activity and the wins in the credit union space, we did have an increase of push-outs in the bank space during the quarter. I believe these push-outs reflect delayed decision-making as banks faced increased uncertainty in the second quarter. However, our bank pipeline remains robust and I believe we can expect to see increased activity in the bank space in the second half of 2016.

Despite these push-outs, I would like to highlight one of our strategic wins from the tier 2 bank team that once again demonstrates the unique value our single platform provides to financial institutions, whether they are large or small. This community bank with roughly $700 million in assets, made the decision to transition from their core provider's front-end software in order to enhance their digital offerings.

After a full vendor evaluation that included many of our typical competitors, the bank chose Q2 to replace their various point solutions, enabling them to consolidate from multiple disparate systems onto Q2's single platform. Additionally, the bank purchased a broad set of new features from Q2 that they didn't have previously, further demonstrating their desire to invest in technology to help them compete and grow.

Transitioning to the operations side, our delivery teams continue to execute at a high level. Taking customers live on or ahead of schedule is one of the key differentiators of our business, and during the second quarter, we completed several large implementation projects that contributed to our strong end-user growth.

The users we added came from a combination of organic growth in our existing customers, as well as the installation of new customers, one of which is Northwest Bank, a $9 billion bank located in the Northeast United States. We were able to take them live ahead of schedule and the customer was pleased with the project. I am particularly encouraged by our execution on this implementation because, in the midst of the project, Northwest Bank announced the acquisition of approximately $1.7 billion in deposits from First Niagara.

Historically, we have been the net beneficiary of M&A activity amongst financial institutions, meaning we've added more users than we've lost on an aggregate basis. I believe Northwest Bank's acquisition provides just one more example of how M&A can be a tailwind to our business.

Now, I will turn the call over to Jennifer and she will take you through the details of our second-quarter results and guidance.

Thanks, Matt. We are pleased to have delivered second-quarter revenue that exceeded our guidance. Let me briefly review our results for the second quarter before turning to updated guidance for the third-quarter and full-year 2016.

Total revenue for the first quarter was $36 million, an increase of 37% year-over-year and up 7% from the previous quarter. Our increased revenue in the second quarter was a result of growth in subscription revenue. Subscription revenue benefited from strong user growth as we added over 800,000 users to the platform during the quarter. Transaction-based revenue increased in actual dollars and represented 18% of total revenue in the quarter, consistent with the previous quarter and down from 20% of total revenue in the year-ago period.

As we turn to gross margin and operating expenses, let me remind you that unless otherwise stated all references to our expenses and operating results are on a non-GAAP basis. Gross margin was 51.1%, up from 47.1% in the second quarter of 2016 and up slightly from 50.8% in the previous quarter. The year-over-year improvement was attributable to growth in subscription revenue and lower cost as a result of the Centrix acquisition. I continue to expect gross margins to show modest improvement in the back half of the year.

Total operating expenses were $22.5 million, up 43% from one year ago and up a modest 5% from the previous quarter. Sales and marketing expenses were $9.1 million, up 37% year-over-year and up 17% sequentially. The year-over-year increase was primarily due to investments in headcount while spending related to our annual customer conference drove the sequential increase. I expect sales and marketing expenses to decline in absolute dollars in the third quarter.

Research and development spending was $7.2 million, up 57% year-over-year and relatively flat as compared to the previous quarter. The increased R&D spending year-over-year reflects increased headcount, as well as the acquisitions of both Centrix and Social Money.

General and administrative expenses were $6.2 million, up 37% from a year ago, but down slightly from the first quarter. The sequential decline was driven by lower spending on professional services.

Given that the Company exceeded $700 million of non-affiliated market float as of June 30, 2016, and will be deemed a large accelerated filer at the end of the year, we will no longer be able to rely on certain emerging growth company exemptions and we will be required to have our external auditors report on our internal control over financial reporting pursuant to the Sarbanes-Oxley Act. Therefore, I expect general and administrative spending to increase in the second half of the year as the Company incurs both increased external audit fees, as well as accelerated spending to ensure SOX compliance on this accelerated schedule.

Adjusted EBITDA was negative $2.3 million compared to negative $2 million a year ago and negative $2.4 million in the first quarter. The year-over-year decline was largely a result of higher headcount across the organization. The sequential improvement was a result of higher revenue and gross margins, which more than offset the higher spending related to our annual customer conference during the quarter. I expect to see sequential improvement in adjusted EBITDA in the third quarter, and we remain on track to post positive adjusted EBITDA in the fourth quarter.

We ended the quarter with cash, cash equivalents and investments of $96 million, down from $105 million in the first quarter, driven primarily by capital expenditures related to our facilities expansion in Austin and Lincoln during the quarter. Cash flow from operations for the second quarter was negative $2.6 million. The Company incurred net capital expenditures of $5.2 million and made final payment of $2.8 million on financing obligations for data center investments. I expect CapEx to decrease significantly in the second half of 2016.

Let me wrap up by sharing our third-quarter and full-year 2016 guidance. We forecast third-quarter revenue in the range of $37.4 million to $38.2 million and full-year revenue in the range of $147.9 million to $149.3 million, representing 36% to 37% year-over-year growth. We forecast third-quarter adjusted EBITDA of negative $1 million to negative $1.5 million and negative $4.2 million to negative $5.2 million for the full-year 2016.

The higher general and administrative spend related to SOX compliance that I referenced earlier is driving a modest reduction in our full-year 2016 adjusted EBITDA. However, as I said, we remain on track to post positive adjusted EBITDA in the fourth quarter of 2016.

Now let me turn the call back to Matt for his closing remarks.

Thanks, Jennifer. In closing, the second quarter was defined by continued revenue growth, early traction with our new products and strong delivery execution with more than 800,000 users added to the platform. We look forward to finishing the year focused on delivering great products, winning deals, empowering returns on relationships with our customers and driving towards adjusted EBITDA positive.

Thanks, and now I will hand the call over to the operator for questions and answers.

(Operator Instructions). Tom Roderick, Stifel.

Let me start with a question on the corporate banking side just in terms of what that opportunity presents you with. Curious if you can quantify for us what the ARPU might look like for your customers or what the general opportunity looks like when you go into an existing customer, tier 1 or otherwise. Does that double the opportunity? How does that get structured? Love to hear a little bit more about how that plays out relative to a typical consumer offering.

Thanks, Tom. From an opportunity perspective, if you think about our offerings now, we have a retail solution, a small business solution and what corporate does is allow us to go after larger companies or businesses that the bank does business with. So those larger companies are typically going to have a larger ARPU, but there's going to be a smaller number of them at the financial institutions. And so those today are typically running on a separate platform with a separate implementation, separate support system.

So, for us, the opportunity -- I don't think it doubles the opportunity, but it definitely increases the opportunity because we are able to walk in, tell the story about a better user experience. The bank becomes more efficient -- or the credit union -- becomes more efficient by consolidating platforms, which is a big part of the discussions that are happening right now with banks, as a way to drive down costs, and it provides a better user experience across all of them.

So we don't like ARPU as a metric just because of all the various users we have, but it will have a higher ARPU with it, but there will be fewer users associated with it. So the opportunity, it's really early for us, but we are obviously excited about the traction we are making. A big win with Trustmark and then many more in the pipeline, but there's a lot more work to do and we've got to continue to iterate on the product.

Great. Okay. Good. So let me turn over to your comments just in terms of just generally on the banking side where you saw an increase in push-outs. I'd love if you could put some parameters around what that means and how you are encouraging us to think about the impact to the model going forward because obviously you guys are raising guidance here. Skeptically I suppose we could simply say you've had a great implementation year and that's what's driving the upside to the model.

So with introducing a little bit of caution here, how should we think about the impact to the model going forward, and when you see push-outs historically what has that meant from how many of them actually come back versus gone for a long period of time?

Let me just provide some color around the comment which is, number one, it's about transparency, which we've always talked about in this business. We give qualitative -- we don't give bookings, but we give qualitative information on it. So we wanted to share that information.

As far as the push-outs go, it is not a matter of them deciding to go with someone else. It's a matter of them delaying decisions. And I think if you pay any attention to our peers in the market, there's been similar comments from many of the peers in the FinTech space.

I can't put my finger exactly on what it is. There was comments from general negativity towards the economy, flat interest rates, continued energy pressure, BREXIT, the election and then it's Fourth of July weekend. So all of those things have contributed to the push-outs.

I think over the 12 years in this business, there's been times when we've seen this happen and not happen or seen this happen before. And what we focus on is making sure that we are in the right spot in the financial institution, also making sure that -- it's really important that when somebody signs a contract with us that they are ready to go live because keep in mind we don't book any revenue when somebody signs a contract. So somebody just signing a contract means nothing to us. It's about them being ready to go live.

So we are walking through that piece of it with them. And I've seen a little progress just since the end of the quarter, which is I got a call from a financial institution's CEO the other day that said, hey, we are ready to get going. Sorry for the delay, but send us contracts. Let's get moving on that. I also had one of the banks that delayed, we began to do terms on the contract back and forth.

So I'm encouraged by the progress, but, with that said, the banks, there is this overhang and we are working through it. I would say that we are not a single-threaded company. We have organic growth from users. We cross-sell our products. As we've talked about, we have a really rich portfolio of products that we've built in the past, as well as new ones that are coming out.

So we have three $1 billion plus credit unions that signed, but tier 2 and tier 1 banks are a part of our bookings plan. So the pipeline looks good and I have confidence in the sales team and their ability to execute, which is what we are going to need to do in the back half of the year.

Tom, I would just add, you asked the question too, how do you think about that from our model because we increased our revenue for this year. And I would remind you that even in the tier 2 and tier 3 banks, it takes about six months from the time they sign a contract to get that revenue live, and on the tier 1 banks, it's closer to a year.

So it really doesn't impact 2016. We haven't changed our guidance. In fact, we've increased our guidance. But if those push-outs continue, it could impact the back half of 2017. So it's really -- again, back to Matt's point of transparency and just making sure that you guys don't get out ahead of yourselves on your 2017 estimates.

Got you. That's great color. Thanks, guys. Appreciate it.

Richard Davis, Canaccord.

So quick question, could you just remind me again the composition of deferred revenues, isn't that mostly services because when you get registered users, as I recall, it goes to monthly billing. And then the second derivative question is why or why not would deferreds be a leading indicator of growth.

And then I guess the corollary of that is is there any kind of notional backlog that you could speak around because you have signed a lot of these tier ones and as you pointed out, you don't get revenues until later when they flip the switch. And again the reason is is I just think about companies like Salesforce started to talk about off-balance sheet stuff. So that would be helpful to frame the story a little bit. Thanks.

Sure. So there are several things in deferred revenue. By far, the largest portion of deferred revenue is the upfront services that get deferred and amortized over the contract term, and those can go into deferred revenue in one of two times. Net new customers when we sign a brand-new logo pay the deposits upfront and that deposit typically includes those implementation services, as well as the first three to six months of the monthly subscription fees.

So when we collect those deposits, that goes to deferred until the time that the customer goes live and starts recognizing that. Any other implementation fees, whether it be from a cross-sell or a customer that already exists that's buying a new module, that also goes into deferred. When they pay it, that typically is not necessarily at the time of contract signing because they are already an existing customer. So there's leverage there and we may get that when they actually go live and we bill that initially.

The other thing is we do have some third-party products that we resell that are annual upfront bills, and the timing of those throughout the year can make the increase or decrease in deferred look a little different as well. The biggest one being we resell the Intuit products and those are on an annual period always from August 1 to July 31. So you will see an increase in the Q3 deferred revenues many times because of that annual Intuit billing. So it's really the combination of all of those and it's not the full backlog. Most of our customers do pay monthly for most of the products.

Got it. So the answer is kind of helpful, but not a perfect metric?

That's right.

There you go. Cool. Thank you.

Eric Lemus, Raymond James.

Looking at your corporate banking product, who do you guys see or who do you guys expect to mostly see at the products you guys are displacing in that particular arena?

In general, the players are the same competition we have in the direct space, which is people like ACI, Fundtech, which is owned by D+H, Bottom Line and then Fiserv has some of these products, FIS has some of these products.

Okay, thanks. And then I wanted to follow up on the digital marketing product that you mentioned last quarter. Any update on when that is going to become GA and any early signs of economics or ARPU lift from that particular product?

Yes, great progress with the betas right now. Q4 is when we expect general availability. We talked about there will be a lift in fees. We intend to make the fees that are recurring and incremental, but we haven't rolled out exactly what the pricing is going to be yet because there's a lot of opportunity there. But it is early stages, very encouraging. Banks and credit unions alike are seeing the value in taking the data that comes out of the platform and using it to help provide better customer experiences, cross-sell products and potentially even cross-sell third-party products.

Got it. Great. Thanks.

Matt Hedberg, RBC Capital Markets.

I wanted to go back to the corporate banking. On the corporate banking side, Matt, I'm curious do you have any idea or could you help us with what percentage of your customers could benefit from these products? I'm just trying to get a sense for how broad the cross-sell could be inside your base today.

Yes, when I look at the corporate banking opportunity, there's a couple things that are interesting about it, which is, in the tier 1 space on the bank side, most of them have some type of corporate product today. In the tier 2, that $500 million to $5 billion space, many of them are extending a small business product well beyond what its capabilities are, so there's an opportunity. They may not have the feature functionality, but they certainly can use it and they've been very receptive to the technology.

I was out on the road last week and I met with three of our customers on the West Coast and they are very excited about the ability to go use these feature functions to go take away business from people like Bank of America, Wells and Chase. So whether you are a tier 2, tier 3 or a tier 1 bank, there's a lot of practical uses for it.

And then you also might have noticed that we signed a credit union, a top 50 credit union, to corporate banking. So what you are seeing is credit unions beginning to look at getting into the commercial side of the business as well and this is a tool for them where they just add the workflows on the platform that's already installed and they are able to offer technology that's just not been available to them or it's been -- you have to deliver a new platform with a lot of professional services. So all of our customers can use it. I think the sweet spot right now is going to be larger credit unions, tier 2 and tier 1 banks.

That's helpful. Thanks, Matt. And thinking more at a higher level on a capacity standpoint, you guys have had a number of strong years of tier 1 wins and as they continue to go live, you talk about an accelerated pace there. Is there a framework that we should think about in terms of your capacity to take on and implement these large deals? I guess I'm curious just from a staffing or a resource perspective, is there enough capacity to continue to bring an increasing number of these live here?

Yes, I think we do have the capacity. As we mentioned earlier in the year, we've got several tier ones that will be going live in the back half of the year so that will free up capacity to take on additional ones. And like I've said in previous calls, we work very closely together with the sales forecasting to be not only what they are bringing in in dollars but what the units that they are bringing in look like so that we are joined lockstep with the implementation team and know what's coming down the pipe to plan for that capacity. So I think we have plenty of capacity to continue to grow.

That's good to hear. Thanks, guys.

Peter Heckmann, Avondale.

A couple questions. We continue to ask if management can consider providing a better indicator of quarterly bookings activity, either an annual contract value or a total contract value. It's difficult to figure out the relative health of the business just calling out a few wins. Do you think a number like that is possible, or alternatively could you give us a contracted backlog of users that are not yet implemented?

So, on the bookings side, Pete, thanks for the question. Our bookings, as I said earlier, are not just tier 1, tier 2; they are so mixed that we believe that the perception of those could be taken in the wrong format. Meaning we could have a number that is lower than you anticipate, but the revenue could come on faster because it's all cross-sell, or we could have a number bigger than you anticipate and you may get too excited about it because it's going to take longer to put it on.

So we have not found a metric that we believe would be useful for you and that would provide the visibility you want, so we try to give as much information as possible. So at this point, we are going to stick to what our metrics are, but we will continue to look at opportunities to provide more. As I said, we do provide qualitative information on bookings and so we will continue to look at it, but at this point we are going to keep with the metrics we have.

Okay. That's why I would think the TCV would be the users times the ARPU, which you should have better insight into than us would be a good metric. The market is not valuing you on 2016 guidance. They are valuing you on 2018 and 2019 and we really need that type of metric to get the confidence for those out years.

One question just for the back half then, strong tier 1 signings over the last two years, great implementation work in the second quarter. Would we expect in the back half that you could add registered users somewhere in the range of 800,000 to 1 million?

Yes, I certainly expect to continue to see the year-over-year user growth in the back half of the year to be in the mid-to-high 30s.

Okay, great, great. Okay, and then last question before I get back in the queue, on the audit costs and the Sarbanes-Oxley costs, were they the primary or the sole factor in the lowering or the increase in the EBITDA losses for the year on guidance, and then do we expect that number to continue to ramp into 2017?

They are not necessarily the sole, but they are the primary. It's a high six-figure number for those Sarbanes-Oxley accelerated costs, and I would expect to continue to incur some of those costs next year. But one of the things that you have to realize is, because we likely did not have all of our controls in place for the full year, EY will actually still have to do a full substantive audit of the financial statements, as well as now a full audit of our internal controls. So it's not the integrated audit and you won't get the efficiencies this year that they might get when they can actually do a fully integrated audit 2017 and forward.

And then additionally I would expect that some of the professional services that we will incur in the back half of this year in order to help us make sure that we are ready on this accelerated schedule will temper down next year.

Okay. That's helpful. Thanks much.

Jeff Houston, Northland.

Circling back to the Trustmark customer win that you mentioned in the prepared remarks. Can you elaborate a bit on what they had before and then what the new corporate banking suite really brought to them?

Thanks, Jeff. So what they had before, they were running our retail business and really were a light user on the small business product. The corporate banking is going to allow them to expand the platform, so they are going to have a consistent experience on their desktop, tablet or mobile phone for their commercial customers with a modern look and feel that has the features they need to go deploy for their customers to run whether it's their cash management needs, or information reporting, or payments capabilities. So what we are really doing is broadening their ability to go out and touch their customers with a single platform, and then they are also becoming more efficient because they are consolidating some of the platforms that they have on the back end.

Great. And then looking at the implementation time for that since they already were a customer, I imagine it's a shorter implementation time than adding a new customer. Just trying to get some more color around what the implementation time would look like as you are likely to continue to cross-sell these into existing clients.

It really depends. Trustmark is going to, in all likelihood, add -- do waves of corporates as they come on. And that's really what you see on the larger side, which is they just do waves of them, so it's a pocket of customers and they add more over time. And that's typically what you are going to see on the early ones that we sign because they are the larger customers.

But with a tier 2 bank or a credit union, they could roll the whole thing out and it could go live and then they just start to try to acquire users to put on the system. So it's going to be different. I'd say on the tier 1s, you are going to see waved, phased rollouts and on the tier 2 and the credit unions and tier 3, you are probably going to see turn it on and then start to add users to it. Our revenue recognition is rather conservative, so it's going to take time for that to hit the top line, but it's one of those things that's going to be there for a long time.

Got it. Thank you.

Mayank Tandon, Needham & Co.

I just wanted to follow up on your comments about the competitive landscape. I was curious, as you move up market to the tier 1 banks both on the retail and corporate side, what is the gating factor to even faster adoption of your services? And then are you running into different players than you mentioned, or is it mostly homegrown systems you are displacing, or would it be the third-party solutions that you mentioned earlier?

So the gating factor typically for these financial institutions is they are large organizations. They make decisions -- sometimes a retail decision will be made separate from a small business decision, which will be made separate from a corporate banking decision. We have to go in and navigate that landscape to determine whether they are looking at this stage for a full platform replacement or just one of those products and then after we sell a deal, we will then go and cross-sell the other products, and Trustmark is a great example of that. They bought retail, added small business and now corporate banking is coming along as well. So there's that piece.

And then there is -- usually they are running legacy technology that they bought years ago that's on a maintenance stream, so you don't really have the hard end date like you do in the tier 2, tier 3 and credit union space, which is my contract with this vendor expires in nine months so I need to sign a contract now so that I don't double pay.

On the tier 1 side of the business, typically they are on a maintenance stream. They might be on an annual renewal, so they have the ability to delay decisions, which I think is somewhat what we had talked -- alluded to some of the comments we made earlier in the call. And from a competition perspective, it's the same group whether it's Fiserv, FIS, Jack Henry, ACI, that group.

Thank you. That's helpful color. Then just turning to margins very quickly, I know you mentioned that you will be EBITDA profitable in the fourth quarter. What does that mean for 2017? Should we expect you to be profitable for all of 2017? And then I would love to get a little bit more clarity in terms of the key leverage points you have on the OpEx lines for 2017. I know you already gave some color on 2016.

Yes, we do expect to remain adjusted EBITDA-positive. We've said in the past that once we get adjusted EBITDA positive, we will not backslide and go negative again. While we may have some variance quarter to quarter for different things, for example, the first quarter is always tougher to have improvement from the Q4 because you've got things like payroll taxes on the annual bonuses, etc., that bump it up, as well as executive raises typically happen at the beginning of the year after comp committee actions.

And then you've got things like in Q3 where you have the annual Intuit payments that I spoke about earlier as well. So from quarter to quarter, it can move around a little bit, but it will remain positive and I would expect the full year to obviously be positive.

Right. And should we expect the leverage to be mainly driven by G&A as we move into 2017, or will there be some leverage additionally you will see on sales and marketing as well, sort of a follow-through from the second half of this year into next year?

I think we haven't done our 2017 planning yet and provided guidance, so how it's going to break out between the lines is difficult to predict at this point, but I would expect that you would see leverage in all lines of operating expenses in 2017.

Great. Thank you very much.

(Operator Instructions). Brian Essex, Morgan Stanley.

Good morning. This is Ivan Holman sitting in for Brian. Just to dovetail on the last question about 2017, can you help us understand how much visibility you do have in terms of the profit ramp? If there are more push-outs, how much flexibility do you have in the center of the P&L to flex in order to hit that positive 2017 EBITDA number?

Remember that it takes -- we've got a lot of visibility at the beginning of any given year. We've got about 90% of our current year revenue already in the wood, so we've got a lot of visibility there. And any new signings in a given year really contribute only a small amount of revenue to the back half of the year, so we've got plenty of runway to see that coming and adjust our expenses accordingly. We are committed to hitting those numbers that we've talked about and remaining adjusted EBITDA positive.

Understood. Thank you. And as a quick follow-up, and also dovetailing off of a prior question, it seems like a major competitor indicated towards the end of July that they had won some clients within the community banking space. Can you help us understand and frame out how you see the competitive threat evolving from some of the larger, more traditional payments processors and players that are moving into what has traditionally been your core market? Any commentary around pricing, the aggressiveness of their salesforces would be very helpful.

So as we talk about the competitive landscape, we've been competing against these people at this company for 12 years and as a group of people that have been together for quite some time for more than 20 years. We believe that digital banking is a business in itself that requires a level of talent and a focus on the user experience and thinking about ways to do things that are not necessarily back-office focused. A lot of times I compare it to the difference in Oracle and Apple. Both are great companies, but what Apple does is different than what Oracle does. And we are closer to what Apple has to do, which is provide a fast, safe, secure, simple, easy-to-use user experience by taking a bunch of complex data.

So the payments companies are largely focused on payments or core processing. The DNA of their development and their team is not better or worse, it's just different. Talent acquisition is a big part of this and being in Austin, Texas is a huge differentiator for us. We've talked about our Lincoln office, which we've been able to get a lot of talent out of the Lincoln market as well.

So I just think we fundamentally do different things than they do and we compete very well against them. We cost more than them from a price perspective, and we firmly believe that aligning ourselves with customers that want to use technology as a weapon rather than as a shield has been a model that's worked for us. And typically in that model those customers know they are going to need to pay more.

We've replaced all of the major competitors 10, 20, 30, 40 times so we are very familiar with it. We compete with them sometimes, but we also partner with them. And it's an ecosystem where we work together. And then on the sales side, I would say that some of our sales teams actually work together maybe behind the scenes to close deals so that one of the cores can win a core deal and we can win the Internet banking deal and we may drag their bill pay along with us.

So it's an environment we've worked in for a long time. We are very comfortable in it, and we continue to do very well against the competition.

Thank you.

Brad Berning, Craig-Hallum.

Could you talk a little bit more -- you guys had the acquisition of Social Money. You've been doing some work behind the scenes on Q2 Labs and CorePro. Can you just talk about where you are at in the development? I think you had talked in prior press releases about having new product rollouts this year. Where are we at strategically in pulling those together? Are there any deliverables that you expect over the next year or so where we will see some evidence of the strategy there?

Yes, Brad. Thanks for asking the question. Q2 Labs is really exciting for us. It allows us to go and work with banks and credit unions so that they can go acquire new customers, gather deposits. You couple that with Q2 SMART, they can begin to do analytics on those customers and potentially cross-sell products or find different types of opportunities to cross-sell.

As you said, I think 2017 is when you are going to hear more about it. We are working hard, the team up in De Moines. Social Money is very talented. They have a really unique product that they've built. So we are very excited about the opportunities there and we will talk more about it in 2017, but at this point we are extremely pleased with the technology and the talent that we got out of that opportunity and we think it's going to really be a tailwind for us in 2017 and 2018.

And strategically is this focused primarily on the existing customer base? You had mentioned in your original press release on this talking about the FinTech side of the equation. Could you talk about does this open up any new channels strategically from a customer standpoint than just the core, or is this a focus primarily on the core?

I would say it opens up a lot of different avenues to us, whether it is FinTech companies that want to -- nontraditional FinTech companies that want to go and use their technology, but they need the security of an FDIC-insured bank account, or whether it's brands that want to begin to do banking. But that's about as far as I want to go right now on that conversation, but it is a tremendous opportunity and we will talk more about it probably in 2017. But we are very excited about it.

Excellent. Thank you for the update.

Thanks, Brad. Appreciate it.

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