Q2 Holdings Inc (QTWO) 2017 Q3 法說會逐字稿

Good morning, my name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings Third Quarter 2017 Results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Bob Gujavarty, you may begin your conference.

Welcome to the Q2 Holdings conference call for the third quarter ended September 30, 2017. 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 not, it is available on the Investor Services section of our Website.

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 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 representative of how we internally measure the business, and they are reconciled to GAAP in the tables attached to our press release, which is available on the Investor Services section of our 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, reconciliation is not available on a forward-looking basis without unreasonable effort.

Finally, I would like to highlight our participation in two investor conferences this month. We'll be attending the RBC TMT conference in New York and the Stifel One-on-One Growth Conference in Chicago.

Let me now turn the call over to Matt Flake.

Thanks, Bob, and welcome to all attendees on today's call. In the third quarter we generated revenue of $50.1 million, up 31% year-over-year and 5% sequentially. We had another solid quarter of delivery execution adding just over 400,000 users which brings us to nearly 10 million registered users at the end of the quarter representing more than 27% growth year-over-year. I was very pleased with our sales performance from the quarter. While the third quarter is typically not strong for bookings, we experienced success across both net new and cross-sell, signing several large banks and credit unions.

The first win I want to discuss is a net new $8 billion bank in the Midwest United States. This bank was running disparate systems for consumer and commercial customers and both were badly in need of an upgrade. They undertook an extensive vendor evaluation with the goal of consolidating systems to enhance their technology and improve the user experience. The bank chose Q2 to serve both consumer and commercial account holders and expects the Q2 platform will not only improve internal operations but also help position them for growth.

Our cross-sell team also had a great quarter, highlighted by the largest product cross-sell in the history of the company. A Tier 1 credit union in the Northwest United States, which initially purchased our corporate product suite in 2016 chose to expand the Q2 platform to serve its consumer account holders as well. The credit union cited the positive experience with Q2's corporate product as a key factor in its decision making. This is significant because as I've mentioned before, the consumer opportunity is typically larger than the corporate opportunity with credit unions, but our client success with our corporate product contributed significantly to our selection. Cross-sales is a key element of our growth strategy and this is just another example of why I continue to expect good things from our cross-sell group.

And on the corporate side, our momentum continues to build in 2017. We signed another Tier 1 institution, a $5 billion bank in the Northeast United States which purchased our corporate banking suite to replace their existing corporate solution. All three Tier 1 wins from the quarter were highly competitive deals that involved all of the major competitors in our space. The breadth and quality of these wins gives me confidence that our message, our platform and our robust product portfolio are continuing to resonate in the marketplace.

Earlier in the call I mentioned our user growth which brought us to nearly 10 million registered end users at the end of the quarter. This is a significant milestone for the company and I'd like to recognize everyone involved. It takes a lot of working pieces, the right product, the right client partnerships and the hard work of our teams to reach 10 million. And we view this milestone as validation of our mission, innovation, people and partnership with clients.

On the product front, I'd like to provide a brief update on our Q2 Open portfolio which is the set of API-based services that we formally announced in the second quarter. During the third quarter we announced the new product called CardSwap in partnership with Chime Bank, a leading branchless bank in San Francisco and the first financial institution to launch the product. CardSwap is designed to help financial institutions generate valuable interchange revenue by getting their debit or credit cards top-of-wallet and it's significant because it represents the first turnkey product we've developed using the Q2 Open APIs.

Since its launch, CardSwap has been positively received by clients, prospects and the industry with one publication complimenting it for its rapid development, deployment and ability to generate revenue. Although it's early for the Q2 Open portfolio, we believe CardSwap is a good example of how Q2 Open will enable us to more rapidly develop new products independently or with partners, expand on our client and partner opportunities and equip our clients and new partners to bring innovative products and tools to market.

Earlier in the year, I commented that we were expecting to see elevated M&A activity among financial institutions in 2017. Now that we're near the end of the year, I'd like to give you an update on how that activity may impact our customer count for 2017. Currently I anticipate 13 logos will be lost to acquisition with five of them going to existing Q2 customers and the other eight acquired by non-Q2 customers. The combined effect of this M&A and normal churn will result in a customer count down slightly from the 385 we reported at the end of 2016.

The timing of this M&A combined with the phased timing of certain larger client go-lives and customer migrations and the impact of the market uncertainty we discussed during the 2016 election cycle will result in slightly lower than anticipated Q4 revenue as Jennifer will discuss in more detail during her remarks. But I will reiterate that because of our ongoing focus on acquiring strategic clients, we have historically added more users than we've lost through acquisition. And I anticipate our revenue churn to remain at 5% or less in 2017, reflecting the strength of our business and our client relationships.

I'll wrap up my prepared remarks by mentioning that we also made a key hire to expand our leadership team during the third quarter. As we announced earlier, we are welcoming Christine Petersen, a more than 20-year veteran of the Fintech industry as our new Chief Revenue Officer. In this role, Christine will lead the entire sales organization, including our direct and relationship management teams. We're excited to have her join Q2 and I believe she'll be a great asset in helping us further capitalize on our market opportunity.

With that, I'll turn the call over to Jennifer.

Thanks Matt. We are pleased to have delivered solid third quarter results. I will briefly review our results for the quarter before finishing with updated guidance for the year. Total revenue for the third quarter was $50.1 million, an increase of 31% year-over-year and up 5% from the previous quarter. We're also pleased to report non-GAAP operating income of $1 million for the quarter marking the first quarter of positive non-GAAP operating income in the company's history and a full quarter ahead of prior expectations.

Our increased revenue in the third quarter was the result of growth in subscription and services revenue. Subscription revenue growth was driven by a combination of organic user growth and customer go lives in the quarter while services revenue benefited from new customer go lives as well as incremental project services at several existing customers. Transaction-based revenue in actual dollars was up sequentially and represented 16% of total revenue in the third quarter consistent with the previous quarter and down from 17% of total revenue in the third quarter of 2016.

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 52.3%, flat with the third quarter of 2016 and down slightly from the previous quarter. Gross margin for the quarter and the year was negatively impacted by a higher mix of services revenue as we continued to incur services expense related to several large customers who have decided to pursue a phased migration of their accountholders. Services margins remain negative and therefore this mix shift resulted in a significant headwind to gross margin improvement in 2017.

Total operating expenses were $25.2 million, up only 9% from one year ago and down 4% from the previous quarter. The year-over-year increase in operating expenses was due to headcount growth across the organization with a primary focus on research and development while the sequential decline was due to the timing of our annual customer conference which was held in April.

Adjusted EBITDA was $3.6 million up from negative $1.1 million in the year ago period and up from $1.4 million in the second quarter. The improvement was driven primarily by the higher revenue and moderating growth in operating expenses. We ended the quarter with cash, cash equivalents and investments of $88.9 million, up from $78.7 million at the end of the second quarter. Cash flow from operations for the third quarter was $11.6 million, driven primarily by a large increase in deferred revenue.

During the quarter we incurred net capital expenditures and capitalized software development costs of $4 million resulting in $7.6 million of free cash flow for the quarter which is an encouraging step towards achieving our goal of free cash flow positive for the entire second half of 2017.

Let me wrap up by sharing our fourth quarter and full year 2017 guidance. We forecast fourth quarter revenue in the range of $51.4 million to $51.8 million and full year revenue in the range of $193.6 million to $194 million representing a 29% year-over-year growth. As Matt mentioned earlier, this represents a reduction from previous revenue guidance of $600,000 at the midpoint as some revenue from customers, which we expected to recognize in the fourth quarter, is now pushing into the first half of 2018 due to circumstances; the timing of which we cannot control.

One instance relates to the timing of pending customer M&A. We generally have good visibility into pending M&A but little control over when the transactions actually close and the users are migrated. In another instance, a customer has adopted our solution but they have slowed the rollout for reasons internal to their organization. We expect to begin recognizing this revenue in the first half of 2018.

We forecast fourth quarter adjusted EBITDA of $3.3 million to $3.7 million and we are raising our full-year adjusted EBITDA guidance up from a midpoint of $8.3 million for the year to a range of $9.4 million to $9.8 million for the full year 2017 resulting in adjusted EBITDA margins of 5% for the full year, up from a negative 3% in 2016.

In summary, the third quarter was characterized by strong improvement in adjusted EBITDA and free cash flow as well as our first quarter of non-GAAP operating income. We are pleased by our financial performance in the quarter and the leverage shown in our model.

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

Thanks Jennifer. I want to reiterate that I'm proud of the organization for a solid third quarter. We continued to innovate and expand our product suite, signed multiple Tier 1 deals and achieved our first quarter of positive non-GAAP operating income. As we look forward to the fourth quarter, our pipeline is strong and I'm optimistic that we will close the year out on a positive note.

With that, I'll turn the call over to the operator for questions.

Thank you. (Operator Instructions.] And our first question comes from the line of Sterling Auty from JPMorgan, your line is open.

Great, thanks. Good morning guys, this is Jackson Ader on for Sterling. First question from our side, as far as the full year revenue guidance, the reduction is concerned, how do you think that splits between customer go lives being pushed out and the impact from M&A?

The impact from M&A is the majority of it.

Okay, and then just to follow-up and so that we're clear, the go lives that maybe you were expecting in the fourth quarter that are now going to be in 2018, is there any risk that there would be a permanent reduction of revenue or is this simply recognition of revenue being pushed out a quarter or two?

This is actually a customer who set their minimums lower than what we typically see and where we were expecting significant growth. So they're actually live on our system and we are recognizing the minimum revenues but we're expecting them to get to their growth expectations during the first half of 2018. So we are recognizing revenue from them; they're not a complete push out. It's just that the level of revenue is going to take another six months to get to where we thought it was going to be.

Thank you.

Our next question comes from the line of Tom Roderick from Stifel, your line is open.

So, I guess I can't help but think about this as sounding like a little bit of an air pocket with some level of reacceleration that comes back next year. So I guess with that as a theme in mind, I'd love to hear your thoughts on that. I fully understand you're not guiding to 2018 at this point. But when you consider that you had a couple of Tier 1s land this quarter, your biggest cross-sell ever, those seem like things that happened earlier than you expected. Curious how you might suggest that we sort of plot their trajectory of growth as we model into 2018. Is that something that will still be more back half loaded before it comes back, could we see it in the first half? How would you suggest we think about all of that?

I certainly think it's more back half loaded. You know, in previous calls I've said that 25% is a good number for 2018 and I still think that 25% is achievable. However, as Matt mentioned in some of his prepared remarks, we've seen an increase in M&A activity, some of which is carrying in to 2018 and the timing is a little bit difficult to predict exactly when things will close and when users will move on or off the system. So given the current slippage, the fact that we didn't sign any Tier 1s in the first half of 2017, I would put a bit more conservatism into my 2018 outlook. And given what I know today, I think a range of 23% to 25% is reasonable but expect the year-over-year growth to be better in the back half of 2018 than the first half as I discussed at the beginning.

Okay, excellent. And Matt, relative to your comments on M&A, I kind of want to split the M&A discussion in half here because when you -- you suggested that there was a handful of logos, maybe 13 logos that were set to be acquired or were being acquired. And then five will go to you and eight will go away. There's an element there of some customer churn or loss that probably doesn't impact the model until next year. But on the other side of it, Jennifer when I hear your comments, I hear that, hey, there's an element of a positive nature where M&A will positively impact you just not right away, not in the fourth quarter.

So, can you just kind of go back to that discussion of M&A to help us understand, you know, what you see sort of permanently falling out relative to your customers that have been acquired and what is just a temporary holdup as M&A works in your favor from acquiring certain other customers? Thanks.

Yes, Tom, it's a good question. I think the color I would provide around M&A is always start with the fact that we are very deliberate and we focus on acquiring strategic customers. And that's work for us from an acquisition perspective in that we have, as I said in the call, in the prepared remarks, we've actually acquired more end-users than we've lost historically.

The only ins and outs of that are -- is that when you're losing customers to acquisition, they're typically the smaller customers and so they get converted quicker than our customers which are requiring the larger banks that are out there or credit unions. So the ins and outs are -- we lose a customer to acquisition and they're typically a smaller one so they get off the system, they come off revenue faster. But we are acquiring larger customers and it takes a little longer to get them and so that's kind of the math.

And if Jennifer wants to add anything to that, feel free.

The only thing I would add to that is that even with the increased M&A as Matt said, we still expect churn to remain at the 5% or less level.

Thank you guys, appreciate it.

Our next question comes from the line of Matt Hedberg from RBC Capital Markets, your line is open.

Matt, first of all congrats on the three Tier 1 wins this quarter, very nice to see the momentum there. I know these deals can typically be second half weighted. I'm curious, can you talk about the Tier 1 pipeline just sort of generally speaking into Q4 and then sort of your expectations into 2018 if possible?

Yes, in the last call we talked about how we started to feel like the tailwinds were picking up in the banking, on the banking side of the business. Credit unions have been pretty steady for us. And I think it actually materialized a little faster than I thought it would, so I put a lot of pressure on the sales organization in Q3 and they definitely delivered on that. So, as far as Q4 goes, I feel really good about Q4, I'm confident in the Q4 pipeline and the pipeline into 2018 looks solid as well.

We've got to keep building it. You add talent like Christine Petersen around the organization, it's great for her to walk into an environment where we're winning and she's got a little bit of time to put her plan in place and how she wants to structure the organization. So I feel really good about the Tier 1 pipeline in Q4. I'm confident we're going to do well there and then we want to continue that momentum into 2018. But it certainly feels like the market is getting in a better spot and I will tell you that this is the best I've felt in 18 months. If you think back to the August call we had in 2016, it's a good place to be right now.

That's great and actually it kind of led me into my second question on Christine. Congratulations on that hire, it's a lot of -- she brings a really, really interesting background to the company, a lot of history in the space.

It's probably too early to tell exactly what she's going to do. But just from a high level, I mean, what's sort of the thought process on what she's going to focus on once she sort of gets acclimated to Q2?

I think she's going to be involved in a lot. She was a part of FIS which is a company I have a tremendous amount of respect for and she was there as they grew from a couple hundred million to $9 billion. And to see somebody that's experienced that and be able to take her learnings and her experience plus the relationship she's built over these years, you know, I don't really put a fence around her and what she wants to do. You know, I can learn from her as much as she can learn from us.

But I think she's going to come in and focus on making sure we're messaging appropriately, that we're strategically positioned the right way and look at our customer lifecycle from a relationship management perspective and determine whether we're doing things the way that a billion dollar company does. Because, as I've mentioned before, we're trying to build this company into a billion dollar revenue company; and if not, more than that. So having people that have seen it played out is really valuable. So she's a great hire for us, we're fortunate to have her and I'm glad she's on the team now.

Our next question comes from the line of Terry Tillman from SunTrust Robinson, your line is open.

Okay, my first question -- I have two questions. The first question -- and I would also echo the prior comments about the new hire, congrats on that and the new Tier 1 wins. But the first question is just on Q2, the Open technology. You know, Matt, maybe could you just help us with how meaningful this could be to revenue and could it do something to even spark more Tier 1 activity where they can use the underlying API and use it in a flexible way and build on top of it?

Yes, Terry, so as you know, we are somebody who talks about good news after it happens rather than before it happens. So I'm very optimistic about the Q2 Open product. I think it is products, it's a way for us to talk to financial institutions, Fintechs, in ways that we haven't been able to before. There's a natural fit for Tier 1 financial institutions and I mean some of the largest in the world with this product because it allows them to augment and enhance their strategy rapidly. They can begin to write to these APIs and roll out products specifically to whatever they may be targeting. It might be millennials, it might be veterans, it might be seniors, so there's a very natural fit there.

From a meaningfulness, I'd rather give us a little time where there's a lot of activity on that side. But give me a little time to kind of roll that into the plan and the model to see what it's going to look like. But we are really excited about the Q2 Open products and as you can tell, we're steadily knocking down capital at Fintech to partner with one of our banks. Last quarter we talked about that, Chime Bank this quarter, we look to give you more good news in the first half of next year as well.

And I guess Jennifer, you were kind enough to actually help us with 2018 without giving us a formal guidance. But just from an overall perspective, as you all keep layering on more recurrent revenue and have good new bookings. You know, how do you think about the balance of investing for growth versus showing some operating leverage, or further operating level in 2018 and beyond? Thank you.

So I think that you'll continue to see operating leverage into 2018. We've produced good operating leverage from both the sales and marketing and the G&A lines this year and I expect that that's going to continue into next year. And then I'm really pleased with the leverage that we've shown in the R&D line this year especially given the fact that we've reduced the amount of software development that we've capitalized by about 50% from the level that we were capitalizing in 2016, so that makes me even more excited about the leverage on R&D.

So I think you're going to continue to see that leverage and even at the revenue growth rates that we kind of talked about, that 23% to 25% range, I still believe that, you know, I'm pretty comfortable with an exception of a couple of outliers at where the analysts have our adjusted EBITDA targets for 2018.

Thank you.

Our next question comes from the line of Richard Davis from Canaccord, your line is open.

Thanks. A lot of the questions have been asked. But Jennifer, when you say leverage, are you planning on -- do you have any plans to kind of change your expense growth trajectory? Or is it more like, look, the revenue growth is happening and therefore we get operating leverage over a fixed cost? And I have a follow-up.

Yes, I mean we don't have any necessary cost reductions planned. But I think the level of growth that you're seeing year-over-year is beginning to moderate because we've now got the infrastructure in place and you're beginning to see some scale out of that.

And then the second question is, of the firms that were acquired that did not go to Q2, which technology vendors were (technical difficulty) they go to?

From a competitive perspective, it's all of the players we usually reference. It's Pfizer, Jack Henry, FIS, those are the ones that we're competing with primarily. On the corporate side you may see a little bit of bottom line in ACI but it's the normal competitors.

Got it, thank you.

Our next question comes from the line of Brad Berning from Craig-Hallum, your line is open.

Sorry about that, can you hear me now? Hey, good morning. I was wondering if you could spend some time on the innovation pipeline, kind of update us where you're at on rolling out remote checking account, kind of give us an update on the technology initiatives you've got on the payments and P2P side as well as any other thoughts that you've got as you move along for the year?

Yes, so I'll jump in because you mentioned P2P. We're seeing, on a low basis, but we're seeing some real growth out of the P2P side of the business, a lot of activity coming out of that. We're really happy with our partner, First Data and their Acculynk product on P2P up from some of the other products, Q2 SMART, we talked about we'd have 10 to 15 in the ground in the third quarter. I think we actually have more than that and I anticipate having about 10% of the user base running their data through that system by the end of the year. So that's a lot of data we'll be collecting and hopefully that can materialize into some valuable input to help our customers go out and generate revenue and provide great service.

The account opening stuff continues to make great progress. We're integrating that into many of the back ends. I talked about the Q2 Open side of stuff whether it's CardSwap or just the CorePro aspect of that, it's very positive. And you're seeing a lot of success obviously out of our corporate banking product which is an ongoing investment and something we are all in on and we're going to continue to invest in. So there's a lot of innovation going on here and we're going to continue to be differentiated by that.

And a follow-up on the corporate banking side. I think you guys had talked about it earlier in the year at some point you'd start to give some metrics on that. Can you give us some current thoughts about the contributions as you roll that out?

Yes. I mean I think as we talked about, it does -- it provides a higher ARPU for us; fewer users, but more per user. I don't know if we have any financial metrics for you, we haven't broken it out from a corporate perspective, but it's a single digital million probably in 2017. And we'll see what it does in 2018 as we end the year out and see what's going to contribute to it.

All right, much appreciated, thank you.

Our next question comes from the line of Brian Peterson from Raymond James, your line is open.

Thanks for taking the question and congrats on the Tier 1 momentum this quarter. And on that point, if we think about three deals getting closed this quarter in view of what the pipeline looks like for the fourth quarter, does getting those deals across the finish line help you focus on potentially more of those opportunities in the fourth quarter so we could be potentially thinking about more Tier 1 deals coming to the fold in 2017?

Yes, I mean, you know, you want to bring them in as soon as you can; and so bringing them in in the third quarter, nobody got punished for that. And then we've still got more of them that are out there to get done. By the end of the year Q4 is usually a big quarter from bookings, not just Tier 1 but Tier 2, Tier 3 and cross. And so we're laser focused on getting those deals done and like I said, I'm very confident in the pipeline for Q4 but now we've just got to go and execute on it. So it's a good time here at Q2.

Maybe one for you Jennifer, just on the services gross margins you referenced, any help on what sort of headwind that was this quarter and should we expect that as the new norm at least through 2018 as some of these implementations continue? Thanks guys.

And what I would say is if we had been at similar levels and I said in the past that services have been about 10%, 11% of our total revenue. It elevated significantly during the year this year because of some of the Tier 1 phased rollouts, etc., and the Tier 1s having more services than Tier 2 or Tier 3. If we had been at a similar mix you would have seen, I believe this year, about 200 basis points of improvement in gross margin. So the mix shift really did produce a headwind there.

And then going into next year, you know, what I would say there is, again, I want to get through the rest of this year and kind of see what other Tier 1 deals might close in the fourth quarter and then look at the mix of the services on the Tier 1 deal signed here in the back half of the year and determine whether they're going to do phased rollouts or go live all at once because that could impact it.

So if we continue to be successful in Tier 1 then I do believe that that mix could remain elevated but I don't expect it to increase significantly year-over-year as it did this year.

Understood, thanks Jennifer.

Our next question comes from the line of Joseph Vafi from Loop Capital, your line is open.

Thanks for taking my questions. First maybe Matt if you could talk a little bit on the pipeline: if you could parse for us maybe perhaps the differential looking out next year in terms of deals that you may see as a function just at perhaps the legacy incumbent player that that contract is coming up for renewal, versus perhaps the percentage you see in the pipeline where some of the banks are really focused on away from the vendor that perhaps is in there now that those banks focused on adopting the best technologies available in the marketplace. That would be helpful, and then I have a follow-up.

Yes. So Joseph I think the way I would answer the question is, it typically -- you know the competition doesn't change and the back office providers do most of -- they have a front office application as well. And so what we're trying to do is identify the financial institutions that want to use technology as a way to differentiate. And so we we're trying to find the ones that are tech leaders and we're -- and trying to drive innovation. So we naturally gravitate towards those.

And that goes back to my comments earlier around the M&A piece which is as long as we're winning the deals that the banks are in it for the long haul, I think we're going to ultimately end up being on the right side of the M&A activity. And as we've said in the past, we want to focus on winning the right deals and be selective, and just like the banks are as well. So, there's not really a difference in those banks that have -- that are strategic or operationally focused. We just try to sort them out and determine which one of those is looking at this from a long haul perspective and then are willing to go and make a five to seven year commitment with us.

Okay, and was there anything specific to call out that -- I mean, clearly the win rate of Tier 1s was much higher in Q3 than some of the other quarters given that all of the Tier 1s this year have been in Q3. But is there anything to call out specifically why you -- that were more successful in Q3? Or is it just a number of deals out there or -- and I know it's a competitive thing, but anything you could provide on that would be great.

And then finally on CardSwap, I just want to be sure, is that -- can that be sold as a standalone product or does that have to be bundled in with your system? Thanks.

Yes, Joseph, thanks for asking on CardSwap. CardSwap is a standalone product. We literally -- we had a group of clients in, 10 or 12 of our clients in, the other day and showed them a quick instance where we turned it up in less than an hour. So it is a product that can be turned on independent of the platform.

As far as the Q3 execution, it's just really -- it's all on the sales team. They brought those deals in, they pushed hard. There's a lot of chaos in the third quarter when you think about weather events and everything and also -- plus vacations and getting back into the year, into the quarter. So the sales team just executed; I'm going to give them all of the credit. They did the work. And then they also, as I said, have built a pipeline that makes me -- gives me a tremendous amount of confidence going into Q4 around the Tier 1, the Tier 2 and the Tier 3 side as well as the cross side of the business.

Thanks very much.

(Operator Instructions.) Our next question comes from the line of Brian Essex from Morgan Stanley, your line is open.

I don't know if this is for Matt or Jennifer, maybe Jennifer given that it's kind of numbers driven. But you had a sales and marketing build last year and you've gotten a lot of leverage off of that this year. Can you maybe talk about how we could expect that to be accretive to the margins and the bottom line going forward? Is that more quota driven now than headcount driven? And should we expect the same amount of -- I mean, it kind of grew 31% of their rate of growth of revenue this quarter. So, anticipate the same or better leverage into next year or is there more to do there?

I expect the same or better kind of leverage into next year. I think for the most part our sales team is fully staffed and I believe bringing Christine in is going to focus that group even more now that they have some tenure and are fully ramped on their quota with productivity improvement.

Got it and then maybe follow-up for Matt, you know, as you kind of build your pipeline and bring in larger deals, you know, what is the composition? I think you noted that one of your Tier 1 customers came on as a full platform customer. What's the attach rate of your pipeline? And then what's the philosophy of bringing new customers on? Do you try and just get your foot in the door and then expand or are incremental customers coming on with higher attach rates?

I think it's a little bit of both, as I've said too many times in this call, we want to find the customers that are looking to use technology as a way to differentiate. You have some situations where you get a new ownership group that takes over a bank that may be an older, stodgier bank that's not thinking innovatively; but a new group of investors come in and they want to use technology as a way to drive down cost. And then you have some of the leaders out there in innovation like Umpqua or Trustmark that are out there trying to continue to enhance their position and grow more market share.

So, you know, what we're -- and we will -- a great example of us getting our foot in the door and [line in] to get to know us is the credit union we talked about on this call. Sold them corporate a year ago, delivered the products, built a relationship with them. They ultimately decided to go with us on the retail side because of that experience, and that's the biggest cross-sell we've had in the history of the company. And if you've listened to the earnings calls over the past couple of quarters, we've had some of these standalone corporate sales.

And then you look at the other Tier 1 we sign in this quarter, they bought everything. And so we believe getting them in the door, building a relationship with them and them understanding about how we think about the future, how we build our products, how we service our customers is a huge differentiator for us and we'll begin to continue to build on that.

So it's -- I'll sell them the whole thing if they want it but if they want to buy just corporate banking, we'll do that. If they just want to buy retail we'll do that. And we'll get to know them and we'll provide great service and we'll build great products. And we'll continue to expand our relationship and get broader and wider in the account.

Okay, that's helpful. Any context in terms of where attach rate stands either now versus historical, and kind of how to expect that to trend going forward?

I don't have that detail right now but we'll go look into that and follow-up with you Brian.

Great, thank you very much.

Our next question comes from the line of Arvind Ramnani, from KeyBanc, your line is open.

Congrats on a good quarter. You know, I just wanted to -- if you could talk a little bit more about Q2 SMART and the impact that you are expecting from this offering. Is this a differentiator that really helps drive business or is it just more of a nice feature? And also, you know, if you can talk about how much intelligence it has and what client feedback has been?

Yes, Arvind, I think you know, every time -- we have rolled out a lot of new products in the history of this company. And I think what we have seen is you have to start by getting the product in the ground with the customer. And as I said, we probably -- I think we're probably close to 20 that are in the ground with Q2 SMART. We'll run more than a million of our end users through the system by the end of this year so we're collecting a lot of data. And I think a lot of people don't buy your technology based on what you've done in the past but how you view the future.

And one of the things for us is we believe the data is at the center of what these financial institutions have to do to compete and differentiate. And so having a business that in less than 18 months we're able, or a product in less than 18 months, where we're able to get 10% of the user's data running through it is something that helps sell software for us. And then ultimately as we work through the products I think there's going to be -- through the data, you're going to begin to see many examples of ways for Q2 SMART to help a customer provide better service.

You may see somebody who has a cash flow problem and reach out to them and offer them a line of credit or some relief. Or you may see somebody who is on the system that looks like a retail user that's actually running a business, so you could offer them more products on the corporate or treasury side. And then ultimately we think there's an opportunity to potentially sell third party products to these financial institutions so that they can begin to generate revenue in ways other than just what they get money for and give it out for.

So it is a product that we believe is very ambitious and will be very differentiated. It takes time for these to build. But just like our fraud analytics product and our corporate product, we're going to continue to keep you updated and work with our customers to build a product that is -- allows them to compete for the long haul. So, we think that we are really building an ecosystem where we're helping our customers generate revenue as opposed to just extracting software costs out of them. And once we get to that point we can have a conversation about sharing revenue rather than how much you've got to pay me, I think it just gives us a whole other leg of growth and a differentiator that will help us win more and more deals.

So, SMART is an exciting product for us and we're going to continue to keep you updated on it and we hope it will be a meaningful contributor to revenue in the future. But right now it's adding value on winning deals, differentiating us and it will continue to -- we'll continue to sell it and enhance it and make sure that it does all of the things that I've talked about.

Okay, thank you, that was really helpful. Congrats on a good quarter and good luck for the rest of the year.

And there are no further questions in queue. Thank you for joining and this concludes today's conference call. You may now disconnect.