Q2 Holdings, Inc. Q2 FY2026 earnings call

• Overall Business & Sales Execution

  • Delivered a strong quarter with results above the high end of prior guidance, reflecting strength in the company's subscription model, healthy demand for mission-critical solutions, and built-in operating leverage
  • Secured 8 total tier one and enterprise wins, with a healthy balance of new customer activity and existing customer expansion
  • Executes on a "land and expand" strategy, demonstrated by a multi-product expansion with a top 25 U.S. bank that added relationship pricing after previously adopting commercial digital banking and risk/fraud products
  • Banking sector M&A continues to drive meaningful momentum, with a recent competitive win where a combined post-acquisition institution chose to standardize on Q2 across its entire footprint

• Annual Customer Conference (Connect 26) & AI Product Launch

  • Held the largest Connect conference to date with record attendance, with clear customer demand shifting from abstract AI interest to practical, workflow-aligned AI applications
  • Launched three new practical AI products aligned with customer priorities:
    • Q2 Assistant: Embeds AI into the digital banking experience to improve banker efficiency via natural language access to data and workflows; already received strong early customer interest
    • Q2 Code: AI-assisted development that accelerates custom platform builds via natural language prompts, extending the capability of Q2 Innovation Studio for personalized digital experiences
    • AI-powered account takeover fraud product: Leverages real-time behavioral data from Q2's core platform to identify and block fraud; already has double-digit customers signed on

• Strategic Positioning & Core Growth Drivers

  • Fraud is identified as one of the most compelling long-term growth opportunities, as rising fraud complexity and costs push financial institutions to seek integrated, trusted platform-based solutions; Q2's central position in digital banking workflows gives it a unique competitive advantage
  • Relationship pricing is seeing strong demand as large commercial banks seek integrated pricing for both sides of commercial balance sheets to improve profitability; the product skews to large enterprise clients with high average selling prices
  • Completed cloud migration earlier in 2026, driving material gross margin expansion; retired the final tranche of convertible notes in Q2 2026, ending the quarter with no debt
  • Board approved an additional $350 million in share repurchase authorization, bringing total available capacity to ~$375 million; capital allocation prioritizes maintaining a strong balance sheet, organic investment, opportunistic M&A, and disciplined share repurchases

Q2 Holdings reports total revenue of $219.8 million for Q2 2026, with 13% year-over-year growth and 2% sequential growth. Subscription revenue, which accounted for 83% of total revenue, grew 15% year-over-year and 2% sequentially. Non-subscription revenue was roughly flat year-over-year, as growth in transactional revenue offset ongoing pressure in discretionary professional services. Total annualized recurring revenue (ARR) grew 13% year-over-year to $971 million, up 3% sequentially, while subscription ARR grew 15% year-over-year to $826 million. Ending backlog increased 17% year-over-year to $2.8 billion, a 1% sequential increase. Non-GAAP gross margin was 62.3%, up 480 basis points year-over-year and 20 basis points sequentially. Total adjusted EBITDA was a record $62.8 million, up 37% year-over-year and 5% sequentially, representing 28.6% of total revenue. Free cash flow for the quarter was $51 million, and operating cash flow was $61 million.

• Full year 2026 revenue is guided to a range of $881 million to $886 million, representing approximately 11% year-over-year growth, an upward revision from prior guidance driven by stronger year-to-date performance
  • Full year 2026 subscription revenue growth expectation is raised to 14.5%, up from the prior 14% forecast
• Full year 2026 adjusted EBITDA is guided to a range of $244 million to $248 million, representing approximately 28% of revenue, an upward revision following Q2 outperformance
• Q3 2026 revenue is guided to $218.5 million to $222.5 million, with adjusted EBITDA guided to $58.5 million to $61.5 million
• New AI products are on track to reach general availability in Q4 2026, with early adopter programs currently underway

• Forward-looking statements (including AI product adoption, revenue growth, and margin expansion) are subject to significant risks and uncertainties, and actual results may differ materially from expectations
• AI product revenue contribution and gross margin profiles remain uncertain, as products are still in early adopter testing; cost structures for AI, including third-party token and infrastructure costs, require ongoing optimization and management
• Discretionary professional services revenue continues to face ongoing pressure, a trend contemplated in current guidance
• Larger tier one and enterprise deal bookings require consistent execution, and growth must accelerate year-over-year to offset the law of large numbers as the business scales
• Fraud threats continue to evolve, requiring ongoing product investment to maintain competitive protection capabilities

Q: How have new AI solutions changed cross-sell opportunities and overall win rates, and what is the subscription gross margin opportunity post-cloud migration?

A: AI solutions are creating new cross-sell opportunities with existing core customers and improving net new deal win rates, as customers increasingly look to trusted incumbents for practical AI. No financial impacts from new AI products are available yet, but early customer excitement signals strong long-term potential. Post-cloud migration, operations are already more effective than at the start of the year, though not yet fully optimal. Continued mix shift toward higher-margin subscription revenue will drive ongoing gross margin expansion, with 2026 representing the expected major step-function improvement from cloud migration.

Q: Have customer budget priorities shifted, and what is the timeline for AI product revenue recognition?

A: Core customer priorities remain growing and retaining deposits, fighting fraud, improving operational efficiency, and pricing commercial relationships appropriately, with relationship pricing seeing particularly strong demand this quarter. AI is additive to these core priorities, not a distraction, and aligns with Q2's existing product strengths. New AI products will reach general availability in Q4 2026, with double-digit early adopters already live for the new fraud product, and lower single-digit early adopters for Q2 Assistant and Q2 Code. Revenue conversion for AI products is expected to be materially faster than core digital banking implementations, but it is still too early to provide specific revenue guidance.

Q: Will fraud product growth outpace overall subscription revenue growth long-term, and what are the synergies between commercial banking and relationship pricing?

A: The fraud portfolio is already growing at a premium to the overall business, and this dynamic is expected to continue for years, supported by new AI-powered products like the account takeover solution and ongoing innovation from fraudsters that requires continuous new protection development. Right now, most relationship pricing growth comes from cross-selling to existing commercial banking customers, as deeper customer trust and vendor consolidation trends open new upsell opportunities. While cross-selling commercial banking to existing relationship pricing customers is slower, it is a long-term opportunity the company is actively pursuing.

Q: How has Q2's competitiveness in fraud improved, and what are Q2's advantages over multiple specialized vendors?

A: Win rates for fraud products have risen steadily over the past two years as Q2 has expanded its innovation and capabilities. Q2's core advantage is its single integrated platform across retail, small business, and commercial banking, which gives it access to comprehensive real-time behavioral data that point solutions cannot match. This allows Q2 to detect fraud based on anomalous user behavior, not just incorrect credentials, creating a material competitive differentiation.

Q: What are Q2's capital allocation priorities now that it is debt-free, particularly around M&A for Innovation Studio partners?

A: With the balance sheet strengthened and consistent free cash flow generation, Q2 now has capacity to pursue three core priorities: organic investment to extend the growth curve, opportunistic share repurchases, and opportunistic M&A. Q2 has not done an acquisition in over five years and will not pursue deals for the sake of size, but has flexibility to pursue attractive strategic opportunities, including tuck-ins aligned with the Innovation Studio ecosystem, when they arise.