Q2 Holdings Inc (QTWO) 2016 Q4 法說會逐字稿

Good morning. My name is Carol and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings fourth-quarter results conference call.

(Operator Instructions)

At this time, I would like to turn the call over to Bob Gujavarty.

Welcome to the Q2 Holdings conference call for the fourth quarter and year ended December 31, 2016. I'm Bob Gujavarty, Vice President of Investor Relations, and with me on the call today 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 services section of our website. Let me also highlight our presentation in several investor events this quarter. We will be attending the Raymond James institutional investor conference in Orlando and the Pacific Crest Emerging Technology Summit in San Francisco.

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 the results implied by these or other forward-looking statements. Also, these statements are based fully 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 statement.

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 the non-GAAP measures are representative of how we internally measure the business, and they're reconciled to GAAP in the tables attached to our press release which is available on our investors relations website. The non-revenue financial measures we'll 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 rates. 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. Let me now turn the call over to Matt Flake.

Thanks, Bob, and thanks to all of you for joining us on our fourth-quarter and full-year 2016 earnings call. Today I will share some financial and business highlights from the fourth-quarter and full-year 2016. I will then turn the call over to Jennifer to provide a more detailed look at our 2016 financial results and guidance for the first-quarter and full-year 2017.

We ended the year with a strong fourth quarter, generating revenue of $42.2 million, up 39% year over year. Revenue for the full year was $150.2 million, up 38% year over year. We also added approximately 800,000 users in the quarter, ending the year with 8.6 million users on our platform, a 36% increase year over year.

I like to kick off today's call by discussing our sales performance from the quarter, in which we had record-setting net new activity and strong year-over-year cross-sale activity. In the first half of the year, we talked about some slow-downs in bank decision-making, which we believe was brought on by uncertainties surrounding the economy and the 2016 presidential election. While this resulted in a handful of our bank deals pushing out further into 2016, we hoped to see our momentum pick back up in the back half of the year and in the fourth quarter.

The sales team signed the most net new customers in a quarter since becoming a publicly-traded Company. In addition to the quantity of deals from the quarter, we added a great mix of bank and credit union customers, representing a variety of regions and tiers, including to new tier one banks, one in the Pacific Northwest, the other in the Northeast.

The latter is a $13 billion bank, which chose Q2's single platform to replace their disparate consumer and business platforms provided by one of the large core processors. They have an equal focus on consumer and business markets and felt the Q2 platform positioned them to provide a unified experience to their customers across devices and customer segments, as well as simplify their back-office operations. In addition to the platform, the Bank signed up for a number of ancillary products, including Q2 SMART, our new behavioral analytics platform, which I referenced in previous calls.

I alluded to a strong quarter on the cross-sale side as well, and I'm proud to report that we signed a record number of contract extensions for a single quarter. In general, I view our sales execution in the fourth quarter in both net new and cross-sale as an indicator that the demand for new technology is alive and well amongst our customer base. And looking into 2017, I believe our customers are excited about the prospect of a more supportive macro and regulatory economic environment.

The fourth quarter also put an exclamation point on a tremendous year of delivery execution from our implementations team. We had two tier one go-lives during the fourth quarter, which along with the delivery of several tier two and three customers, contributed to our user growth for the quarter.

As I mentioned earlier, we added 800,000 registered users during the quarter, bringing our user growth from 2016 to a grand total of 2.3 million users. While this was a remarkable year for our delivery teams, I would like to point out that we are looking forward to 2017. We expect our end-user growth to moderate due to the volume of business and corporate deals we signed this year, which generally result in fewer users added per customer but higher average revenue per user.

We've also had some recent developments on the product front where we officially launched Q2 SMART, our new behavioral analytics platform. While it's still early in the lifespan of this product, it's received a positive reception from customers and prospects. We have more than 20 customers already signed up for Q2 SMART and it's proving to be a competitive advantage in net new deals as well.

Before handing the call over to Jennifer, I'd like to briefly reflect on the year we had in 2016, during which we had many great accomplishments across the organization. We succeeded in adding new customers and expanding relationships with existing customers, demonstrating that the digital transition is still taking hold in our market, and that our own customers have an appetite to deepen their technology partnership with us.

We had another year of meaningful product innovation in which we continued to round out the functionality of the Q2 platform. Our corporate banking suite gained considerable momentum in the market, being adopted by new and existing customers and receiving recognition from industry analysts.

We've also seen Q2 Labs, our innovation-focused product group, begin to gain traction in the market, and we expect some exciting news from this group in 2017. Finally, we continue to execute against our financial targets, highlighted by our transition to positive adjusted EBITDA in the fourth quarter. With that, I'll hand the call over to Jennifer to discuss our financial results in full detail.

Thanks, Matt. We're pleased to have delivered fourth-quarter revenue that exceeded our guidance, combined with solid gross margin improvement and our first quarter of positive adjusted EBITDA. I will briefly review our results for the fourth-quarter and full-year 2016 before finishing with updated guidance for the first-quarter and full-year 2017.

Total revenue for the fourth quarter was $42.2 million, an increase of 39% year over year, and up 10% from the previous quarter. Revenue for the full-year 2016 was $150.2 million, up 38% year over year.

Our increased revenue in the fourth quarter was principally the result of strong growth in subscription and services revenue. Subscription and services revenue benefited from new customer go-lives in the quarter, including the two tier one customers Matt referenced earlier.

Services revenue also benefited from the conversion of the last [Sterling] users to [Upload Instant] on our platform. Transaction-based revenue increased in actual dollars and represented 17% of total revenue in the fourth-quarter and the full-year 2016, down from 20% for the full-year 2015.

Our revenue churn for the full-year 2016 was 5.1%, up from 3.5% in 2015. The increase was largely the result of the PacWest Bank which transitioned off the platform in the third quarter of 2016. Looking ahead, we expect churn to return to levels at or below 5% for 2017.

Despite the expected increase in revenue churn, our net customer adds grew year over year, ending with 385 Q2 customers installed on our platform, up from 369 at the end of 2015. Our trailing 12-month revenue retention rate for 2016 was 122%, consistent with prior years. As a reminder, this metric compares revenue of all installed customers at the end of the previous year with the revenue from that same group of customers at the end of the current year.

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. Gross margin was 53.2%, up from 48.4% in the fourth quarter of 2015, and up from 52.3% in the previous quarter. The year-over-year improvement was primarily attributable to continued growth in subscription and services revenue and increased productivity of headcount and data center investments. For the full-year 2016, gross margin was 51.9%, up from 47.3% in 2015.

Turning to operating expenses, we continued to invest in our business, however the pace of growth moderated in the fourth quarter. Total operating expenses were $23.3 million, up 28% from one year ago, but up only slightly from the previous quarter. And we ended the year with 742 employees, up from 658 employees at the end of 2015.

Sales and marketing expenses were $8.8 million, up 32% year over year and up 4%, sequentially. The year-over-year increase was largely due to headcount, while the sequential increase was primarily due to an increase in discretionary marketing spend.

Research and development spending was $7.6 million, up 25% year over year and up slightly from the previous quarter. The increased R&D spending year over year and sequentially reflects increased headcount and professional services to support our product road map.

General and administrative expenses were $6.9 million, up 25% from a year ago but down 4% from the prior quarter. The sequential decrease was driven by a decrease in professional services. I expect G&A spending to be up sequentially in the first quarter due to seasonal factors.

Adjusted EBITDA was positive $1.3 million, an improvement from negative $1.1 million in the previous quarter and negative $1.9 million in the year-ago period. The improvement was driven primarily by the higher-than-anticipated revenue and gross margin. Adjusted EBITDA for the year was negative $4.5 million, a 44% improvement from negative $8.1 million in 2015.

We ended the quarter with cash, cash equivalents and investments of $97.1 million, up from $92.3 million at the end of the third quarter. Cash flow from operations for the fourth quarter was $4.8 million and we incurred net capital expenditures of $800,000.

Let me wrap up by sharing our first-quarter and full-year 2017 guidance. We forecast first-quarter revenue in the range of $44 million to $44.6 million, and full-year revenue in the range of $191.5 million to $193.5 million, representing a 27% to 29% year-over-year growth. We forecast first-quarter adjusted EBITDA of breakeven to positive $300,000, and positive $5.3 million to positive $6.7 million for the full-year 2017.

As in prior years, we expect the headcount additions, seasonal factors such as payroll taxes and the annual client conference which is held during the second quarter of the year, to impact the pace of adjusted EBITDA improvements in the first half of the year, followed by notable improvement in the back half of 2017. In summary, 2016 was another amazing year for Q2, with continued revenue growth, margin improvement and a huge milestone accomplishment in posting our first quarter of adjusted EBITDA positive.

In 2017, I anticipate we will continue to deliver revenue growth and improved profitability, with a goal of achieving another milestone achievement of positive free cash flow for the full-year 2017. With that, let me turn it back over to Matt for his closing remarks.

Thanks, Jennifer. I'd like to take a moment to thank our customers for believing in us, our investors for their continued support and our employees for all of their hard work in making 2016 another great year in our Company legacy.

I'll wrap up the call by setting the stage for what I believe will be another year of strong performance in 2017. Our product suite is broader than it's ever been and I expect us to continue delivering innovation to the market and expanding our relationships with customers. With that, I'll hand it over to the operator for questions.

(Operator Instructions)

Sterling Auty, JPMorgan.

Thanks, hi, guys.

Good morning, Sterling.

Let's start with -- I missed the first couple of minutes of prepared remarks so I apologize. A couple of tier 1 deal signings in the quarter. I heard the comments about the moderated user growth given the tough compare.

But wondering, how should we think about layering in or the timing of these new big wins? When will they start to go into production and at least begin their ramp? I imagine probably the timing of it is going to be a bigger benefit in 2018 than 2017.

That's exactly right, Sterling. Remember, the tier 1s have, on average, about a 12-month install. And given that they were signed in Q4, you are right up against the holidays at the 12-month mark, so they're going to impact 2018 much more than 2017. If there's anything in 2017, it will be small towards the end of the year.

And then on the moderated user growth, I would point out, as Matt mentioned in his prepared remarks, given the corporate- and business-focused deals that we signed, those accounts typically come with a smaller number of users, but the offset is higher revenue per user. So from a modeling perspective, I would model registered user growth slightly below revenue growth, but the offset will be the higher ARPU.

That makes sense. How much of the investment here in 2017 also is the expenses that are attached to the couple of new big deals that you've got? In other words, you have some expense hit but you're not getting the full benefit of the revenue, so we would expect a little bit of margin hit from that before it starts to ramp.

Yes, you'll have a little bit from that. You also, in the first half of the year, have the seasonal factors. Remember, we pay corporate bonuses annually.

So, in the first quarter of the year you have large payroll tax hits, and then in Q2, we have our annual client conference which gives a big hit. So, you really see a lot of pressure on those costs in the first half of the year with improvement in both gross margin and operating margins in the back half of the year.

And last question, Matt, from a high level, I think most investors and myself believe, hey, given the rising rate environment, your core customer base should be getting healthier. Are you starting -- are they feeling that? And is the number of discussions that you're having starting to pick up or hasn't really hit quite yet?

Yes, Sterling, the tone has changed from pre-election and post-election. So, the optimism around the things you talked about, less regulation, maybe an increase in the yield curve, we got to see what happens in March.

The tone has changed and the activity out there continues to grow. It played out the way we talked about it where a lot of it came in late in the fourth quarter. So, the sentiment out there is going of the right direction. Our job is to go execute and turn that into bookings.

Okay, sounds good. Thanks, guys.

Thanks, Sterling.

Tom Roderick, Stifel.

Hey, guys, good morning. Thanks for taking my question. Matt, I wanted to follow up on Sterling's question there, on some of the regulatory environment and the new administration. It sounds like it did actually have somewhat of a positive impact in the fourth quarter.

The follow-up to that is, is that influencing or impacting the way at all you are thinking about 2017 in terms of sales capacity? Can you and Jennifer both talk about how you guys think about planning for adding to sales capacity, how much more you need particularly, as it weighs against what the pipeline is looking like right now?

I'll talk about where I think we are from a -- on the field perspective. We added some folks in 2016. Some of that spend last year was on marketing to drive the brand. One of the things we want to do is we want to make sure our name is included in every deal like some of the bigger guys are. I feel like we've got good coverage.

We'll obviously add some folks throughout the year, but I feel like we have really good coverage ratios out there in the tier 1, tier 2 bank and credit union side of things. So we're in a really good spot as far as that's concerned. Like I said, we need them to capitalize on the sentiment that's out there and our platform resonates really well in this environment.

Great. And Jennifer, follow-up for you. I've gotten a couple questions from some of your investors on the deferred revenue topic, given the commentary around strongest new signings and most signings and you got a couple of tier 1s.

Can you remind us the puts and takes that go into a fourth-quarter deferred revenue number with perhaps seasonality on the services side? And then the timing around how you bill for some of those tier 1s, how that might have impacted the fourth quarter? And then how we ought to think about it impacting going into this year?

As I've mentioned before, deferred revenue, in our opinion, is not a good proxy for bookings because it does depend upon the timing of when deals are signed and the collection of the related customer deposits that come along with those. And Matt mentioned, many of our deals came very late in Q4, and then with the holidays it will obviously be Q1 of this year, 2017, before we collect many of those deposits on those deals.

But what I would point out is that deferred revenue did grow still year over year approximately 18% in a year where we only had two tier 1 signings, both of which were late in Q4. And the prior year had several significant tier 1s throughout the year for us to collect. So, I was still happy with that year-over-year improvement, given the timing of the deals during the year.

Got it. That's helpful. I will jump back in the queue but thank you, guys.

Thanks, Tom.

Richard Davis, Canaccord.

Hey, thanks. A couple of quick questions, and I realize it's a blunt instrument but if you guys have 8.6 million registered users, if you got maximum adoption for -- e-banking adoption, what would that number be? I'm trying to figure out what the upside capacity would be. And I just have one quick follow-up.

Richard, in general, banks and credit unions, which are pretty evenly mixed across those 8.6 million and their financial institutions, on average the adoption for the community and regional financial institutions, around 50% to 60% of the account holders. There's another 7 million to 8 million that are out there.

The other thing I would say is keep in mind that there's data around credit union members, the number of members that have joined credit unions. And that number has grown every year for the last five years. I think ultimately the point there is people want to bank with community financial institutions, but community financial institutions need to have the technology that's competitive. That's where we fit in really nicely. Next question?

Got it. So there's headroom. And very quickly, teeing off of Sterling's comment and your response, when this thing went public, it was hoping to be a 30% to 35% grower. But you've outlined what's happening in this current year.

Is it conceivable that 2018 and beyond, you would return to that 30% to 35%? I don't need quarterly guidance for 2018, but at least at a high level, should we think of it this way? Or is this a 25% to 30% growth business?

Richard, I would point out it's only February, and the deals that we signed in 2017 will contribute significantly to 2018, and some to the back half of this year. So, I think it's a bit early to determine exactly what the 2018 growth rates will be. But as I said before, I think 25% is still a reasonable bottom bound.

And the other thing that I would point out is if you look at the numbers we've been giving you year over year on transactional revenue, we continue to decline there. We anticipate 2017 transactional revenue will be about 15% of our total revenue which infers a year-over-year growth rate on that portion of the business in the low to mid-teens.

And so, if you look at that then our core business is still growing north of 30%. It's really being impacted by that slow-down in about a fifth of our revenue on the transactional side.

Great, that's helpful. Thank you.

Matt Hedberg, RBC Capital Markets.

Thanks. This is actually Matt Swanson on for Matt. Congratulations on the strong year-end here.

Thanks, Matt.

Looking at Q2 SMART, I know it's early, just been out for about a month, but can you talk about what the potential penetration rate of the install base? What percent are good candidates for the product?

I think, ultimately, the product will be -- it's a great fit for any financial institution of any size. Basically, what we're trying to do is take all of the data that occurs, the behavioral data that occurs on the devices, marry that to the transactional information and help our customers, banks and credit unions, understand ways to provide better service to their customers, cross-sell their products and then even potentially cross-sell third-party products.

So, we're trying to digitize their customer's experience and then use that as a way to help them grow their business. No different than Amazon or Netflix understands the next movie I need to watch or the next product my wife needs to buy.

And then following up on that, you talked about it as being a competitive differentiator. Maybe if you could expand a little on that, about how that product competes competitively? And then with it being developed internally, could you talk a little bit about what could be next in terms of features or potential additional products using some of these machine learning and statistical analysis that's used in the Q2 SMART?

From a differentiated perspective, when you -- as the only vendor of any size that as a single platform that takes all of the transactions from the mobile phone, the tablet and the desktop, we then marry that to our fraud analytics products. So we really started machine learning behavioral analytics in 2009 when we started our fraud analytics product, which essentially does the same thing. It just determines whether somebody is conducting a fraudulent transaction or not. That has been adopted with great success.

The differentiators for us is there's really nobody else out there in the market that tells the complete story that we do, which is any time one of the customers touches these devices, married to the transactions and able to give you a better view of what the customer is doing. So, there's really nobody else that's telling this story as holistically as we are. There's plenty of people talking about behavioral analytics but nobody that's got it in the field like we do at this point, that I'm aware of.

The next set of products, as I talked about a second ago, the first part is how you provide better service to the customer. That's one of the things that we think we can do digitally better than you do in person.

The next thing is how do we help the bank cross-sell products? So, identify somebody that may be in the market for a home equity loan; identify somebody who might be saving for a car and then go put a product in front of them. And then ultimately, we believe there is an opportunity to cross-sell third-party products, where the bank gets a piece of that transaction, so they can begin to generate revenue in ways other than just what they get money for and give it out for.

All right, thanks for your time.

Thanks, Matt.

Peter Heckmann, Avondale.

Good morning, everyone. Nice results.

Thanks, Pete.

Matt, could you give us an update on the competitive dynamics? I think Pfizer acquired a number of older platforms this year; Jack Henry rolled out their Banno product. Are you seeing anything in terms of competitive efforts that are worth calling out? Anyone catching up, as it were? And then in a similar vein, how do you feel about pricing on renewals?

Yes, in the competitive market there's no change. We've heard of a lot of the products you're talking about have been in the space for a long time and the ownership may change. We know how to compete fairly well against those. A lot of times when those transactions happen it creates opportunities for us because there's changes that have to happen.

There's really no change in the competitive environment. It's still the big guys, Jack Henry, Pfizer, FIS, NCR, those are the ones that we are regularly going head-to-head with. And the other question was around --?

Pricing on renewals, I'll take that piece. I feel good about our pricing on renewals, given the pace of innovation and the new products that we are rolling out, even if there's some pressure on getting volume discounts because the bank has grown their registered user base. We've been very successful in offsetting that by adding in new products that we've developed since they took the last one.

And so the renewal is included in part of that trailing 12-month revenue retention, which has consistently been north of 120%, with 122% again this year. So I feel good about our pricing on renewals.

Good stuff. Then on the M&A side, two small deals since the IPO, what's your relative appetite there? Do you think we'll see additional acquisitions, potentially in 2017?

Yes, we're out looking for things and participating in those types of conversations. It's got to be strategic for us, nothing transformational. We'll look for things that can help with margin expansion and growth, and in a perfect world, both of those. But nothing to report on that front right now. We've been very happy with the Centrix and Social Money transaction we've done.

As I alluded to, there's going to be some exciting stuff from Q2 Labs, we think, coming out. The engine behind that is Social Money. We're really happy with the ones we've done and I think they're happy as well. So, nothing transformational, we'll continue to look at stuff that's out there, but we want to find things that we can obviously grow within our base.

Great, thank you.

Thanks, Pete.

Terry Tillman, Raymond James.

Hey, thanks, good morning. I was afraid I wasn't going to be able to ask a question there. Nice job on the quarter. My first question, Matt, relates to -- you've alluded to 2016, there was a lot of success in terms of new business more on the corporate side.

And then obviously that translates into lower number of registered users but a higher ARPU. Is that something we should actually, based on where you've been focusing on innovation and where sales cycles are, should we continue to see that sales motion in 2017 where it's more biased towards corporate? Or could it shift back towards consumer?

I think you'll probably see a similar pattern as we saw in 2016 around that mix. That's why we alluded to the ARPU number probably going up, was the success around not just corporate but even the business banking stuff. It takes some of your user numbers down but, yes, I think you'll probably see a similar pattern. Jennifer, do you agree?

Yes, I would agree.

We knew you'd (multiple speakers) so we weren't worried about that (laughter).

Yes, well, I do have a tiny follow-up. Last year there was a variety of net new products that were being worked on and then have come to fruition, SMART being one of the latest ones. If we think about 2017 and potentially new ARPU-generating products, could we see a similar pace?

Or is it going to be more of a digesting what you brought to market and then just trying to sell the heck out of those new products? And so, less about new product catalysts in 2017 as opposed to 2016? Thank you.

Thanks, Terry. We are an innovation Company and we're investing 18% to 19% in R&D. We have many things that we're working on, whether it's enhancing the platform or things outside the platform. Typically we talk about those product releases at our client conference which is this year in April. And then we'll release more of it in May. But yes, the innovation train's going to keep moving.

The thing I would say, like things around corporate or SMART, they're very early in their life cycle. We have a lot of enhancements and improvements to do to those products because we think they're big opportunities. But yes, we're going to continue to innovate. There will be new products as well as a lot of enhancements to the existing stuff. Not done, by any means.

Thanks.

Mayank Tandon, Needham & Company.

Thank you, good morning. Most of my questions have been answered. But Matt, staying on the corporate theme, could you talk about what is driving your success early on against some of the incumbents who have been in this market for years? What is the value proposition that is helping you win? What are the road maps for investments to help you continue to gain share on that side of the market?

Thanks, Mayank. Our methodology here that has worked, which is we go try to find problems in the financial services space. We then go hire people with deep domain expertise which we did for corporate banking in particular. And then we work closely with the technology team and a group of developers that work with modern stack. We go and try to go build technology that can help financial institutions compete with the mega-banks.

We started this initiative with corporate banking several years ago. When we walk into a community financial institution or even a credit union and talk about corporate banking, we're able to offer them corporate functionality on a single platform which gives them leverage around one set of interfaces to the core to check imaging, statement imaging, a better user experience, touch-enabled. If you look at what Wells Fargo and those guys are doing, they're rolling out touch-enabled corporate banking.

So when we're able to go to this financial institution and offer them corporate functionality that works with a modern look and feel and design and works with modern browsers, there's nobody else that's doing that today. So our differentiation is we're working on a modern technology stack and then chipping away at the feature functionality. So when we walk out to the financial institutions, we're able to show a track record of delivering and executing on our road map. Maybe slower, maybe faster, depending on the feature functionality, but when we go do that and then we talk about the corporate stability, 13 years of doing this, whether it's been retail or small business, we've executed.

So that formula has worked for us and we're going to continue to go drive that message. Then we will build the functionality one step at a time, working closely with our customers to do it. I think we have a very collaborative spirit with our customers and it shows up in our products.

Thank you, that's helpful. One quick one for Jennifer. Jennifer, in terms of gross margin trajectory, could you give us some color on how we should think about the gross margins for 2017? And then provide some color in terms of your long-term gross margin target in terms of timeline and in terms of hitting those targets you've laid out in the past.

I expect, as I mentioned earlier, that the investment that we'll have in the first half of the year in hiring, as well as the seasonal factors around payroll taxes and client conference, et cetera, will really moderate the growth or the improvement in the first couple quarters of the year. But you'll see significant improvement in the back half.

We're still very committed to annual year-over-year improvement. It may not be the 400 or 500 basis points a year that we've had for the last couple of years, but it will certainly be a nice improvement. I think you'll see us exiting next year with Q4 getting closer to a long-term margin than it is to where we're at now. I'm very happy with the progress that we've had there and I think we're well on our way to hitting that 60% number.

Great job, guys, thank you.

Thank you, appreciate it.

Joseph Vafi, Loop Capital.

Hi, thanks for the opportunity to ask a question. Just two quick ones. Given the strong exit to the year in new customer signings, you could provide some commentary on the strength of your visibility to this year's guide versus in the past. And then I've got one follow-up.

As we said in the past, ever since IPO road show and consistently thereafter, going into the year, given the fact that it takes on average 6 to 9 months to install our customers, and then on the tier 1 customers it's closer to 12 months, we really have 90%-plus visibility into our revenue guide on January 1. It's really the determining factor of our year-over-year growth rate is the deals that we sign in the first half that we can get into revenue in the back half of the year.

But going into the year, we have 90%-plus of our revenue under contract. And we just have to execute and make sure that the implementation team delivers and we have a history of doing that.

And we didn't factor in any acceleration into our guidance.

Right. And then secondly, if you could comment at a high level, on trends in average deal size. Given good traction with a few, at least a few larger clients, what are you seeing in terms of the average deal size for new deals at this point versus, say, a year ago or 18 months ago? Thanks, a lot.

We don't disclose average deal size but I can certainly tell you that we've had year-over-year increases.

Thank you.

Brian Essex, Morgan Stanley.

Thanks, this is Ivan sitting in for Brian. Around your comments on free cash flow, you indicated that you might see positive cash free flow for the first time in 2017. Could you please give us a little bit of color as you see it currently in terms of what the cadence of that might what look like? What are some of the puts and takes that we should take into consideration?

Yes, I think that you'll see still no positive free cash flow in the first half of the year. Our capital investments tend to be more heavily weighted towards the first half of the year. But our CapEx will decline significantly in the back half of the year. So I think we could have for certain, one, possibly two quarters of free cash flow positive, and I believe it will be strong enough that we'll be free cash flow positive for the full year of 2017.

And a quick follow-up. On one of the prior questions around pricing, congratulations on displacing that large core processor, but how much did pricing factor in that decision? Have you seen any changes in terms of how especially your banking clients are approaching pricing, particularly given what is arguably a better environment for banks, given what's going on with the rates and potentially with regulation?

A lot of the bigger guys use price as a way to compete. We've operated in that environment in the existence of this Company for a long time. In particular, I can't go through whether one of them was more competitive than the others, but we've always had to deal with that pressure. We've got to go sell our value and that's one of the things that we seem to be able to do really well. So nothing more pricing.

Thank you.

Thanks, Ivan.

(Operator Instructions)

Brad Berning, Craig-Hallum.

Good morning. On the cross-sales you talked about a record sale, and I think if we backed into this right, it looks like almost half of your revenue growth this year came from cross-sales. Given the record that you are talking about, is that the kind of sustainable rate do you think that is going to be that big a contributor going forward, given your commentary about the product breadth expansion?

I do think you'll continue to see a good chunk of the revenue growth year over year coming from cross-sales. We've disclosed historically that we've had north of 120% trailing 12-month revenue retention, and that comes from that combination of registered user organic growth where we get excess user fees, combined with the cross-sale. And given the products that we'll release this year and what we have on the horizon for next year, I don't expect that trend to change.

And then to follow-up on that, on the product innovation going forward and product road map for this year, could you talk a little bit further about some of the products that you're going to talk about in April on your annual day that you guys have? Can you give a little bit more color about what that product road map looks like this year?

We're really going to hold that for our client conference in April, so it's a little premature. We'll talk more about some of that on our May call.

Okay, we'll look forward to that. Thank you, congrats again.

Thanks, Brad, appreciate it.

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