Q2 Holdings, Inc. Q2 FY2025 earnings call

The company delivered strong financial results with revenue of $202 million, 15% YOY growth, and adjusted EBITDA of $49 million, 24.2% margin. Free cash flow was $37 million. Bookings were the best in company history for the third quarter, featuring 7 Tier 1 and enterprise deals. Digital banking had success upmarket, fraud solutions gained traction with a large expansion, and relationship pricing saw strong multiyear renewals. AI initiatives were showcased at Dev Days, including AI Copilot and partner data integration. Leadership changes included Hima Mukkamala as COO and Kirk Coleman as Chief Business Officer, with a transition plan for Mike Volanoski.

Third quarter revenue was $201.7 million, up 15% year-over-year (YOY). Subscription-based revenues grew 18% YOY, accounting for 82% of total revenue. Services and other revenues increased 5% YOY. Adjusted EBITDA was $48.8 million, up 50% YOY, with a margin of 24.2%. Free cash flow was $37 million in the quarter. The third quarter also saw record bookings, with 7 total Tier 1 and enterprise deals driven by new and expansion wins across all major product lines.

Fourth quarter 2025 revenue is forecasted to be in the range of $202.4 million to $206.4 million, and adjusted EBITDA to be $47.2 million to $50.2 million. Full-year 2025 revenue is raised to $789 million to $793 million (13-14% YOY growth), and adjusted EBITDA to $182.5 million to $185.5 million (23% of revenue). For 2026, expected full-year subscription revenue growth is approximately 13.5%, full-year gross margins at least 60%, adjusted EBITDA margin expansion of approximately 250 basis points, and full-year free cash flow conversion of at least 90%.

Actual results may differ from forward-looking statements due to industry competition, technological changes, and regulatory compliance. Uncertainty around the impact of bank M&A activity on services revenue and potential upside/downside. Disruption from core consolidation of other vendors could affect RFP volume and market opportunities.

Q: Congrats on the quarter. Matt, some changes on the management team that you outlined here. Maybe just talk about why now is the right time to make some of these changes to the structure of that organization? And what you expect the biggest changes we'll see in the near term are under the new leadership here?

A: Yes. Thanks, Parker. For us, it's -- yes, you guys live quarter-by-quarter. We didn't just do this overnight. We've been trying to structure the business in a way to align the technical resources where our delivery support, the people that build the product and host the product are aligned because so much of that is connected to the engineering team. And so Hima is a proven commodity for us. We've been really impressed with him. Kirk hired him as a big advocate for him. And then putting Kirk in a position to do go-to-market and the product side of things, where he has deep experience. He's been a buyer. He's been a seller. He's been on our side as well. So it's just a perfect fit at this time, and we wanted to get it done before the end of the year, so we could put our plans together for '26 and beyond. So it's -- coming off a strong quarter just happened to be what happened. But really excited about these changes, and I think they put us in a position to really accelerate our products, our go-to-market as well as our initiatives around AI.

Q: Terry Tillman asks about tilt in 3Q to 4Q bookings.

A: No, we are cautiously optimistic about the fourth quarter. We're focused on getting deals done. I see a lot of good indications, but I don't know anything until it's done, but we are -- the pipeline is strong. We didn't drain it in the third quarter, and we're going to -- we intend to execute on those and continue to build the pipe for '26.

Q: Andrew Schmidt asks about pricing and M&A impact on subscription revenue.

A: No, there's nothing abnormal. I mean, a lot of people that don't have the feature functionality we have, they use price as a tool to try to win deals. And sometimes banks go for that. We have a lot of discipline around that. We will walk from a deal if it doesn't fit our economic model and hope to pick them up later. But there's no significant change on the pricing side of things from what we've seen from people. From an M&A perspective, that's a little bit different. There, we don't really build that in from the standpoint of upside for our subscription revenue base. We do have some visibility, and we certainly make assumptions around services work tied to M&A. And I think that's informed a little bit in some of the non-subscription line item guidance we gave on the '26 front. But to the extent that goes more in our favor than it has historically, that would be upside to the plan. But we've seen a pretty strong year from an M&A standpoint. I mean, Matt talked about 2 deals this year, where we won up into the acquirer tech stack and for the combined bank, which is a great sign for us. But overall, M&A activity from a services perspective has been pretty high in 2025. And so we expect that to continue in 2026, but not necessarily to see the same growth we saw year-over-year relative to 2024.

Q: Cris Kennedy asks about gross margin outlook for 2026.

A: For sure, Chris. So the single biggest lever that we will see driving that upside in 2026 is the completion of our cloud migration project on the digital banking side. And so we'll be completing that here at the end of '25, very early in 2026. And so as we exit the data centers, you see that depreciation roll off, the very clear cost savings coming off. And then, as you think about operating in the environment that we're in from a cloud perspective, there's just so much opportunity for learning that environment and operating with more elasticity, more understanding of how to be efficient in that new world. And so we feel really good about the guidance we've given. But there's also all the other things that go into that in terms of revenue mix, AI efficiencies, all the things we're doing across support and delivery to become more efficient that are all accruing into that gross margin line.

Q: Dan Perlin asks about macro impact and '26 guide EBITDA margin.

A: Historically, as I've seen core consolidation happen over the last 25-plus years, it generates opportunities for us. So when a bank is forced to -- or credit union is forced to switch off of the general ledger they're running on, it pushes them to go evaluate all their technology and what they want to do because it's such a disruptive thing for them. So I -- RFP volume, I looked at it before, is similar to what it was last year right now, but this stuff is just kind of hitting the market now. So it's something to watch. Obviously, we're paying attention to it. For us, we know all the prospects in banks and credit unions. We're calling on them all the time, marketing to them and keeping our name in front of them. So when they do decide to take a look, hopefully, we get called. That's the objective. So other vendors have different challenges. We've all had challenges at different times. And I don't -- I expect those to get fixed. And so we're going to continue to attack the market we're going after and use our product and our customer experience and our culture as a differentiator. Dan, let me make sure I'm getting your question right. Are you referring to Q4 EBITDA? No, '26 guide EBITDA, 250 basis point margin expansion year-on-year. Just the incremental margin on that would suggest it's probably closer to 50 versus maybe 60 that you're going to land on in 2025. I got to make sure I'm following you. When we look at our 2024 to 2026 financial framework, one of the metrics we talked about was EBITDA margin expansion. And what we talked about there was the 3-year average, '24 to '26 would see 360 basis points of improvement on average. With 2024 in the bag, and 2025, the guide we just provided, both well over 500 basis points of expansion each of those years, the implied 2026 EBITDA margin expansion before the color we gave today was quite low. It was sub-100 basis points in terms of the implied '26 margin expansion. In providing that 250 basis points of expansion, I think what we're trying to show is we actually expect more operating leverage in 2026 than what those numbers implied. So hopefully, that helps. I just -- I didn't reconcile that to the 40 to 50 number you were talking about.