Q2 Holdings, Inc. (QTWO) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Thank you for joining me. My name is Andrew Schmidt. I'm from Citi's fintech research team with a focus on fintech software. It's my pleasure to host Q2 today. With us from Q2, we have Matt Flake, President and CEO; Jonathan Price, Head of Strategy and Emerging Businesses; and Josh Yankovich, Head of IR. Thanks, guys. Appreciate you joining me.

Thank you. Thanks for having us.

So I think a lot of folks in the audience are familiar with Q2, but maybe we just start with the levels of the business. Where is the focus today?

Yes, so business is celebrating our 20-year anniversary this year, founded really with the principle that we want to build strong and diverse communities by strengthening our financial institutions, big audacious goal. But how do you do that? You do it through technology. So we built a technology platform that helps community and regional banks and credit unions compete with the big guys. We have a platform that provides retail, small business, corporate banking along with fraud and analytics to drive better experiences to allow businesses and consumers to be more efficient. We have about 22 million users on the platform. They logged in about 5 billion times in 2023. We process hundreds of billions of dollars of transactions that roll through the system. We also have a relationship pricing tool that helps banks price the relationship, whether it's a loan or deposit. We have $1.2 trillion of loans that we price on the platform and the more than $1.3 trillion -- and $1.3 trillion of deposits. So it's the largest collection, it is the largest loan book in the world. We use that product to -- it's the Bank of America prices every middle market loan around the world in that product. Last quarter, we signed another one of the 4 biggest banks in the country to use that platform. 7 of the top 15 banks in North America use that. And then we also have -- from a revenue perspective, we have long-term contracts; average term of the contract is 66 months. We have -- we've converted -- we've moved to profitable growth in August of '22. We've shown more than 800 basis points of improvement in adjusted EBITDA since that period of time. We've talked about revenue acceleration in '25 based on the bookings that we just came off of. We had record bookings in the fourth quarter; the best bookings here in the history of the company. We signed 17 Tier-1 financial institutions, but also had many other financial institutions that are below $5 billion in assets that are customers of ours. Really strong year coming out of some really tough years during the pandemic. And then, Jonathan, do you want to talk about Innovation Studio and Helix?

Yes, Helix is our -- what we call our Bank-as-a-Service business. Think of it as our cloud-based core. So while everything I talked about on the digital banking side is the front-end facing the experience. We also have a lightweight back-end core. Historically, we've used that to power fintechs and brands that wanted to enter banking, but didn't have the infrastructure or the banking know-how to go do it. So we could do that on a lighter-weight ledger at much lower cost than the traditional core providers. Open APIs, so you can innovate quickly on top of it. That's our Helix business. We just announced in the last quarter, we're going to also exploring opportunity to bring that closer to our financial institutions, as FIs are in this mode right now, deposits being their top priority and how do they gather, retain and grow deposits and the legacy infrastructure, unfortunately, comes at a high cost, and they have certain demographics within their customer base that are very expensive to house on that legacy infrastructure. So we're giving them an alternative and we're going to our existing customers to test that thesis. So we're excited about that Helix pivot back closer to our core customers of banks and credit unions. Innovation Studio, Think of it as really the opening of that digital banking platform, that front end, but also it opens up the core because it brings more of the experiences that their end users use to the experience layer. So think of it as a partner ecosystem into digital banking. We plug in parts of the financial journey that partners would provide. Think of credit monitoring or financial wellness or if you're a small business, payments apps, ARAP, accounting and finance software for these small businesses to help them run their business, all embedded within the banking experience they get through our digital banking platform. Very interesting development over the last couple of years. We scaled that from just a handful of partners when we went GA in 2021 is now over 160 today. We went from a couple of -- call it was about 10 to 15 of our banks as early adopters 3 years ago to now almost 80% of our digital banking customers using that innovation studio marketplace. So we're excited about the impact that has, impacting that new wins. Over 90% of our wins in the year last year cited it as a key reason for choosing us. It is having a huge impact on reducing digital banking churn and getting more retention and engagement from our customers as they adopt these partners and their end users are using more of these products, which make us stickier and we're driving economic value for them as well because we're sharing some of the revenue, we're delivering more products and then faster. So excited about Innovation Studio. And then the last piece, the AltFi business, that came out of our original Cloud Lending acquisition 5 years ago and think of that as our lending loan origination business for nonbanks, primarily about half of that business is international and is typically serving nonbank, we call the AltFi lenders that are capturing a certain part of the market and certain geography, think mortgage in Australia or other but its nichey and where a bank is the leading market share provider of those types of loans.

Got it. Exciting stuff, super helpful. So I think the mission to empower banks and credit unions hasn't really changed, but there has been a lot of changes in the last couple of years, obviously, with the pandemic and the demand cycles went with that. Most recently, the emergence of commercial and a real emergency of commercial and product set demand. Obviously, there's been technology platform evolution. But maybe to a higher level, Matt, how is the Q2 strategy focus or internal execution kind of changed throughout all that?

Well, we've remained focused on building technology that helps every bank compete and credit union compete. I think the market has changed probably the most. If you think about, we built this business largely in a rate declining environment. So banks were extremely focused on loans and deposits were easy to come by, whether it's the $5 trillion that got put in the system or the QE that occurred from 2010 to 2022. And so being as successful as we were doing that in that environment when you have rates go up 500-plus basis points in a year, and then you have -- it puts pressure on deposits and then you have March 10 with Signature Bank and Silicon Valley Bank, where you saw some deposits leave commercial customers to go to the big 4 for whatever reasons those were. Our products -- the vast majority of our products are about deposit retention and growing deposits. And so what happened is, as you've seen this demand environment ever since the kind of the end of the third quarter of '22, fourth quarter '22 and then '23 with the record bookings, has really been people want to use our products to retain and grow deposits and the most coveted deposits and most financial institutions are the commercial deposits. So they're stickiest, they're the most profitable, they're the hardest to leave, and so that's where the demand environment really has come in. We -- our first line of code in 2004 had ACHs, wires entitlements, tax payments all built into the platform. But in 2012, we made a serious commitment to moving upmarket into commercial banking functionality, and that has paid off when you look at -- we have 110 clients, bigger than $10 billion in assets, and we are -- we have probably the most coveted group of community and regional financial institutions customers in the United States.

Got it. And actually, I want to piggyback on the demand comment because demand has been very impressive the last couple of quarters. Maybe -- and you talked a little bit about this on the earnings call, maybe heading into 2024 -- or 2024 to date, how is demand in the pipeline versus historical levels? Maybe you can just put that into context for us.

Yes. So when you have a big year like that, the fourth quarter has always historically been a very large quarter for us. You come into Q1, you kind of expect a low in the pipeline. The pipeline is greater today than it was a year ago. So that pipeline is -- it's different than what it was at the end of the year. It's more banks between $1 billion and credit unions between $1 billion and $15 billion. But -- that's always been the bread and butter of this business. They sign a contract. We get them live in 6 to 9 months. We have all the integrations. There's not a lot of heavy lifting to do on those projects and they're great customers for hopefully, 20 years.

And not asking you to predict bookings, but you do have a pretty solid pipeline, as you mentioned. Win rates, I think, are at or near record levels. How do bookings environment set up for 2024 versus 2023 as we look out?

Yes. I mean I think like I said, we have more of those banks and credit unions between $1.5 billion and $15 billion, which we like our positioning in there, especially on the commercial side. Pipeline looks good for the first half of the year. I don't want to probably not say too much on the back half of the year. But I think you'll see it build the fact that we have as many customers as we do above $5 billion, a lot of those customers buy one product wait for it to go live and then they buy another product. So they may be going live on retail. And if you do a good job and you take care of them, then they'll end up buying small business or commercial or relationship pricing. So the expansion opportunity outside of the net new is tremendous as well for us. So we'll continue to build the pipe through marketing, being in front of customers, conferences and those types of things. I think you'll continue to see momentum in the pipeline based on the demand on deposits. It's the center of the universe for them right now.

Got it. Before we jump into competition and well this kind of ties into that, I do get a lot of questions around penetration levels overall, just from a digital banking perspective? In some extent, it's maybe a little less relevant because you're kind of moving up market, but maybe talk a little bit about that in terms of where just Q2 is in terms of penetration and where the additional opportunity is?

Yes. So there's about 9,000 banks and credit unions in the United States. We have 450-ish that are our customers. So obviously, there's a lot of greenfield in that area. But also, like I just said, we did 19 Tier 1s in '22, and we did 17 Tier 1s in '23. They skewed a lot larger in '23, but many of them bought 1 or 2 products, and we have multiple products to go sell them. So the opportunity to expand and with win rates where they are with customer sat where it is, we think we're going to continue to see that grow in the marketplace.

Got it. And then just to go into the competition point, clearly, it seems like you guys are hitting your stride in Tier 1. I mean, larger than -- larger deals than you've historically announced. But maybe to talk about Tier 1, Tier 2, Tier 3, how the competitive environment and when rates are trending. And I think part of this is also talking about before, look, still committed to those Tier 3 clients, but they're probably something that don't make sense from a strategic perspective. Maybe talk about that mix shift a little bit too?

If you break it out and you think about like Jack Henry, Fiserv and FIS control about 90-plus percent of the back-office systems, but they also have a lot of the front office legacy digital banking solutions. And so that's largely who we compete with on the $5 billion and above, that's mostly Fiserv and FIS that have the majority of those customers. And also, you have players like Bottomline, which is a legacy commercial banking solution and a product that's spun out of ACI. So we've competed favorably, our win rates are higher up market, fewer opportunities, but we win more of them upmarket. If you move to the Tier 2, which is $1 billion to $5 billion as it was defined 10 years ago at IPO, there's those players, the legacy core providers, plus you have some point solutions, legacy point solutions out there that we compete favorably against -- our win rates are at historic levels right now there. And then Tier 3, to your point, we'll do business with any bank or credit union that wants to use technology as a weapon and not as a shield. So for me, it's about does the bank -- there could be a new ownership structure, it could be a bank who says we want to use digital and minimize our physical footprint and begin to use the efficiencies we get and have better experiences, be able to use technology like some of the larger customers have because it's an ecosystem for us. So if Synovus is using this product, the $2 billion bank, the $500 million bank gets that same product. Now whether they have the same customer set, it just depends on the bank. But we don't discriminate on banks or credit unions that are smaller because they're smaller. We'll do business with any of them. Those -- some of those customers have different financial pressure on some of the decisions they have to make. But we provide technology to the largest banks in the world as well as to some of the smaller ones.

Got it. Message received. So I think I want to dig into our product portfolio. And as you've articulated, you've made the right long-term investments and commercial didn't just show up. You are ready when the demand hit. So maybe talk about where you're investing in towards sort of new product functionality, things like that? And maybe talk about digital banking and then I'll bring in -- or wherever you want to go and bring in Jonathan talk about Innovation Studio and Helix.

Yes. I'll keep it pretty simple. So the user experience, how people feel when they use the technology, the brand of the bank or the credit union needs to be felt when they're using it. They built all these branches with mahogany and marble and the pillars and all that stuff to make you feel a certain way when you walk into a bank but if they're not going to the banks anymore, they need to feel that way online. And so if they deposit a check, we want the credit union to get the credit for that, that feeling of I just got away with something. I didn't have to drive anywhere. I just deposited a check, it saved me time. So driving user experience that way. Commercial, it's a long journey, and we've come a long way, but there's still a long way for us to go. We're going to continue to invest in that piece of it. With more demand on the products, there's more fraud. So we have the premier fraud ACH and check product out there in the marketplace right now that continues to grow for us. We're going to continue to invest in ways to keep our bank secure. And then data, whether it's AI or whether it's machine learning around fraud and behavior to cross-sell products and some of our initiatives around AI are around how to make a banker's life more efficient and more easy so they can focus on selling products at the right price at the right time. We're investing in that area as well. So that's -- there's a lot going on, but those will be the high level and Jonathan can talk about Innovation Studio and Helix.

Yes. On the Innovation Studio side, I would think of that as just an extension of the R&D leverage we get on the digital banking platform. So when you think about -- when I talked about earlier about opening up the platform and letting these partners in and embedding those products within digital banking, if you think about the segments of the financial journey of a retail customer or a business customer, let's take a business use case, whether it's their accounting needs or accounting software, B2B payments, ARAP we're embedding this functionality into the platform where a small business can now go to their financial institution and actually help them run the business with apps that have very obvious value propositions by being integrated with digital banking, be it data, HR, payroll integrations, et cetera. And so we're basically widening the innovation paradigm of Q2's digital banking platform without having to go build it. And so there's a lot of benefits to that. One of that is R&D leverage because we just get a wider aperture of products, but it's also as somebody that's responsible for corporate development, you get tremendous visibility into what products attached to the platform well, add value to the platform on behalf of our customers that they see and not just what sells into the banks well, but also what their end customers end up adopting and using that make us stickier. And so seeing all that is also valuable in the context of long-term M&A strategy. That's Innovation Studio. On the Helix side, where -- when I talked about earlier how we're pivoting this and bringing for the first time Helix as core into the financial institutions as part of sort of a longer arc of core modernization that we expect the FIs to undergo, we're not ripping and replacing FIS, Fiserv, and Jack. They have spent decades, 30, 40, 50 years building these cores out. What we're saying is -- there are lots of cohorts of their customers that don't make sense living on that legacy expensive infrastructure. And we have a product that we can go bring to them that's proven scale. We have over 15 million users on the Helix platform. And when we think about the innovation road map there, we'll go where those banks want to go within the context of that Fabric strategy. So if they want to build up business accounts that they want to build out, right now, we don't do credit on that core. So like there's a road map there for we can take when we think about innovation there. But what they need right now is the ability to go gather, Matt talked about attraction, retention and growth of deposits. That's what these banks are all thinking about, and they can do it with the bank and their core customers, but they can also do it, whether it's partnering on the sponsor bank side with Helix as a partner bank, whether it's launching, we signed a bank in Q4 that basically wanted to go launch their own Bank-as-a-Service initiative, but they needed a lightweight core to do it. They can't do it with the legacy infrastructure. So they use Helix for that or like we're talking about with Fabric, go launch their own digital brand, and we're going to go on that journey with them with that tech stuff.

Got it. And we were going to talk about innovation Studio a little bit, but I might as well pull that forward now since we started talking about it. What -- for FIs that have adopted Innovation Studio, what kind of uptake you see in terms of number of third-party applications being used? And what are some more common areas? I would imagine kind of obviously, SMB is a very competitive area, so bringing SMB solutions in might be interesting in terms of retention there. But just curious what you see on that front?

Yes. I mean there's a lot of popular apps, I would say like at the end of the day, what these banks are doing is consuming more products that they otherwise would have had to pay for and they probably in a prior model with us would have had to wait a long time for us to go build that integration. Now these things are all available off the shelf. The implementation times used to take 6, 9, 12 months to go build the integration, it's going to take somewhere between an hour and 30 days to get most of the stuff provisioned inside their digital banking applications. So you're giving them a huge boost of their product with in a much shorter time frame, but they're also adopting things that get them more engagement and growth with our customers. So specific products that are interesting on the retail side, one of our most adopted products would be like Experian IDnotify. Their customers can go to experian.com, log in and get credit monitoring. But if you think about what you actually have to go through to sign up your financial life such that you get credit monitoring, there's a lot of inherent value in doing it through the financial institution when they already have all your data and they can set you up and do it in the context of your trusted financial institution. That's a big one. You mentioned the small business apps. We -- our most adopted customer would be over 10 apps right now, that they have live in production. And those are apps where they're saving money. In some cases, they're getting the rev share that we share with them in our marketplace model. $0.50 of every dollar we strike in rev share, we're sharing back with the FI. So it sort of changes our fundamental relationship and start to become a revenue generation engine for them. So yes, we mentioned some of them; Autobooks is a very popular app that we have a lot one of the apps that helped -- that's done a great job with customers with in-app support. So you think about that, you're not going to go charge your end customer for better service in the digital channel. But if you want to differentiate your FI, you're going to need best-in-class digital support and we've had dozens of FIs uptake on that partner. And so it's -- what we're trying to be in the Innovation Studio model is [ Switzerland ] what I mean by that is if we find a segment of the financial journey that the banks and their customers really want, like digital customer support in the app, our job is to go find the best vendors in the space, make sure they have some choices, 2, 3, 4, 5 of them and then let the FI choose what's the value proposition that's most compelling for their use case. Not to pick winners and then force it out upon them. And so that model has resonated really well. And that's why I think you've seen in just over 2.5 years, we've gone from about 20 FIs that were early adopters to almost 400.

We had a panel with ICBA and another tech vendor yesterday. One of the challenges is, I think, with FIs is, there's so many options out there for third-party integrations. How do you know which one is good or vetted and you kind of bring that to the FI?

We're not going to replace their diligence efforts. They are banks. They're very risk-averse institutions. So they're going to -- in many places, we will supplement that but they're going to want to do it. And don't take for granted. You mentioned it when you think about all these third-party integrations. Very hard for a bank to go do this one-to-one across dozens of third parties. And so having this all centralized and managed at the integration layer of their digital banking platform adds a lot of value for them just in the overall like management of all these third-party relationships.

100%. That's a big pain point. Maybe just last question on the product front. So -- maybe it's just external, but it does seem like the pace of sort of product development velocity has picked up a little bit over the last couple of years. Maybe that's just external. But has anything changed in regards to the product process, how you incubate products to roll out? Or is it more business as usual?

Well, to some extent, we've been an innovation company since the very beginning, right? One of the things that you begin to see is we put a lot of energy and effort into the products in '20 and '21. And then when you start selling a bunch of them, you start hearing about it. So it's been the cadence of the business forever. We still put 19%, 20% into R&D and we have a long ways to go. If you're trying to digitize everything you do in person at a bank or a credit union or a finance company, it's kind of -- I don't know if that's ever going to end. But -- so it's really a matter of you see a lot more of it because of the demand environment right now.

It makes a lot of sense. Maybe switch gears, just a couple of financial questions. So obviously, a bright spot, last quarter was the longer-term sort of revenue -- subscription revenue and EBITDA targets. On the revenue side, is that indicative of having more visibility I guess, just with the pipeline and what you're seeing from a win rate perspective or just a function of getting out there and wanting to communicate that there's more visibility to the market. I guess it's kind of the same question, but -- maybe you could talk about the visibility aspect towards achieving that target.

So you're right, Andrew. A couple of things factored into laying out that 3-year outlook was one, we previously laid out this kind of [indiscernible] on a total revenue basis target for the second half of this year. So one, as we're getting closer to eclipsing that we wanted to make sure to provide a new outlook that was beyond the current outlook of 2023-24. But you are right that increasingly with each quarter, more and more of our revenue profile is mixing towards subscription revenue, which is the highest margin business we have, but it's also the highest level of visibility that we have into the business. And so behind that fourth quarter of really strong bookings as well as the backlog growth that not only sets the stage for '24 or '25 and '26 and beyond. That's what gives us a high level of conviction in being able to lay out just -- not just '24 but all of these deals that are really starting to set the same foundation for '25 and then '26 and beyond.

Got it. Thanks Josh. And then -- and then a question I get a lot is how do you square sort of the 14% subscription growth with the 19% ARR growth that you had? Because 90% isn't live that should come to fruition at some point let's call it, in the next 9, 12, maybe 16 months. So it seems like you might have visibility towards higher subscription growth. Obviously, proven when you set those expectations, but -- so we want to reconcile those 2 things?

Yes. So if you compare that 19% to 14% of subs there are that we had in the third quarter of 2023, right, it clearly implies that the bookings that we had in the fourth quarter would result in subscription acceleration. And that's a great forward-looking metric for our subscription revenue growth. And that's what gives us confidence to do that 14% over the next 3 years. The one thing that it doesn't contemplate is read the time of the revenue mix that's associated with some of these deals. And we talked about not just in the fourth quarter but for the full year '23, Matt talked about four of the largest -- 10 largest deals we ever groped in company history. And then in the fourth quarter alone, we had the first and the second largest. And so those are going to having elongated time to revenue. So you can't look at that '19 as a perfect indicator of a period that's following after that. But yes, it is a good indicator that we see acceleration in subscription growth in 2025, and we have moved to that just last week on the call.

And if you look quarter-to-quarter, you see that ARR subscription growth be a little variable throughout the year. I think that longer-term view of that throughout '23, at least a back half of '23, is a better forward representation because any one quarter like in Q4, there were some favorable comp elements. It wasn't huge, but like it's also relative to the prior year fourth quarter, and so 19% was a reflection of the strong bookings, but there's also some elements of this; is it favorable comp, is it a tough comp? And so if you elongate that period, it's a better indicator of the forward view.

And to some extent, I think that going back to what we were talking about with bookings earlier, I guess, bookings environment will dictate sort of book something in late 2024, it goes live in late 2025, it's more of a 2026 growth rate, so it'll inform 2026. So there's probably an element of that in there as well.

Absolutely. I mean if you just look at the first quarter guidance that we gave relative to the full year for '24, you can see that we are implying some level of acceleration as you exit '24 year exactly right.

Got it. Makes a lot of sense. Maybe we round out just the financial conversation with the EBITDA targets. I guess the 300, 400 basis point on average expansion each year, what is that sort of if you could break that down in terms of like scale versus OpEx savings, I know you have a lot of efficiencies going on, that would be helpful.

So the biggest piece -- one of the biggest pieces, right, is the increasing mix to that higher growth in subscription revenue. And as we indicated on the [ non-subs line items ] the trends that we've been seeing over the last 12 to 18 months, which are kind of flat to slightly negative, we expect that trend to continue. And so you're going to see margin expansion just from that revenue mix alone. And then beyond that, Dave and me last week talked about -- of that 300 to 400 basis points of annual adjusted EBITDA margin expansion. About 40% of that has come from cost of sales, with 60% of that coming from OpEx. We've done a lot of good work over full year '23, where we just in that year alone 580 basis points of adjusted EBIT margin expansion for things like leading into a global workforce, growing that optimization. But during that time, we've been focused on not a singular cost actually to drive that margin expansion. It's always been a slow methodical multiyear expansion. So we'll continue to lean into that as well as just internal efficiencies to hit those targets.

Got it. Helpful. Maybe let's switch back to Helix and talk about Fabric a little bit. Maybe talk about the use cases that are resonating in the market in terms of how FIs are using this as sort of a [indiscernible] or deposit gathering is obviously an important part of this, but how are some FIs utilizing this?

Yes. Some of the early discussions we're having with our customers that, let's say, they bank in Georgia and they want to go national. They're going to do it in an all-digital. They're not going to go build branches all over the country. So they're going to do it digitally. They're an existing customer of ours on digital banking, which is where we're really targeting this Fabric strategy. We think we have a right to win and an existing strategic relationship with those customers. And so that's one example where the regional or community institution wants to go national in a digital-only environment. They want to go quick. They want to go relatively inexpensively because they don't -- they have a view of what the unit economics of that initiative will be, but they haven't actually seen it come to fruition. And they want infrastructure that they can do it in a scalable way with them. And so that's one example. Another one I can think of -- I mentioned already, but like a lot of these banks are actually saying, what if I don't launch my own brands like that, but I want to play in this broader space of Bank-as-a-Service. And I know that's sort of under some regulatory scrutiny, which I think is part of where we differentiate actually being the core and the source of truth. But a lot of these banks, yes, maybe now they're not going to want to enter [ BaaS ] as a sponsor bank anymore, especially not with the middleware providers. But what they may want to do is own it themselves, like go talk to their own fintechs, their own brands, their own prospects. But to do that, they're also going to need a lot of moving infrastructure that they can go move quickly on it. So that's where they would use Helix for. So those are a couple of the use cases, but I think it's just this general trend of, if they over time want to modernize their back end, they are not going to have to report FIS/ [indiscernible]. They're going to have to prove over a multiyear, maybe even, call it, 5 to 10 years, what is the way that we can get a more profitable way to serve these customers, and they're going to start with retail. They're going start with their lowest margin customers. And maybe then they don't start by converting any existing retail and just say, no, I'm going to go target net new on the stack. And then when we go target that and then improve the model and then go start converting customers. So it's going to be a long journey. We're excited about it. And again, we're not going and building a product from scratch. We have this core that has over 15 million accounts on it today, and we've proven it, and we have some FIs that have used it for a long time. And so this is just a place that the opportunity in the market has set us upward.

And when we think about just how the capabilities might evolve on the Q2 Fabric platform, could you -- over time, is there a plan to iterate to add more functionalities? And I guess the question I want to ask is, could it become comparable to a full service core versus [indiscernible]core over time?

I mean, the full-service cores have 30, 40, 50 years of innovation -- I won't call it innovation. That's a loose term, but certainly investment into them. And so what I would say is one of the value propositions we have with Fabric is we are wrapping Innovation Studio around that tech stack. And so one of the things that it sort of seems like you're cannibalizing your own value proposition, but we believe more of the value prop should be at the experience layer rather than the back-end core. And so by putting Innovation Studio in there, we use the term hollowing up the core. So we're bringing more of the features and functions that their customers are going to want up to that experience later. So when you take the digital banking platform they're using, wrapped with this entire partner ecosystem plugged in and then this lighter weight ledger on the back end, it's not that we're not going to innovate and add products. I mean we're already -- we're going live in 2024 with business accounts on that core, not in the Fabric context, but in the Helix context. And so we'll evolve what goes into that core and they're going to want us to innovate and develop with them on that product. We just fundamentally believe it's good for them. It's good for us to have more of that value proposition at the top end of the stack.

Got it. Maybe a product question on Q2 Catalyst, which is clearly gaining a lot of traction. So I think you talked about earlier just differentiation what's driving the win rates. Can we drill down in terms of what separates Catalyst versus some of these other solutions in the market from a cash management or treasury?

Yes. So the Catalyst is really a full solution that starts with pricing the relationship. So it incorporates multiple products into the experience. But it starts with pricing the relationship, the right way using the data we have so that the treasury salesperson goes and adds the person; the relationship manager goes and adds the customer. And then one of the challenges if you are banking with another bank and moving to a new one is they sign a line of credit in 1 day, but it takes them 30 to 60 days to move all of their information, their payroll files, their receivables, their payables, their wire information, entitlements, all of that. And so then you move from pricing and then you say, hey, we can take that process from 30 days to 3 days. So you get the deposits quicker, which is obviously top of mind. And so you move from there to then you get on the commercial banking solution and then you begin using the product where you're sending wires out and there's fees associated with that and ACH out with that. And so it's -- the timing is perfect for us to offer those solutions to our customers.

Right. And then maybe a higher level of product portfolio question. You've done a good job over time sort of adding things on in sort of providing -- being able to provide more things to customers. What's the sort of the next leg for you? What do you think you need to add to sort of supplement the product portfolio?

Yes. I mean, it's kind of what we talked about earlier, you got to drive user experience. You've got to drive more commercial functionality and that goes -- that goes a long way. There's a lot of different places you can go with that. You can start to work with the commercial customers that may be concentrated in property management, they could be real estate developers and there are certain systems that they use, integrations into those systems to make it one pane of glass to look at to run your business. Then you work to the back of it and one of the fraud things that you're doing, there's a lot of stuff with machine learning that we're doing to make sure that we stop fraud and recognize the bad guys out there. Obviously, the ability to go understand the 5 billion log-ins, the 22 million users that $1.2 trillion of loans, the $1 trillion of deposits. How do you take that data, and this moves into large language models and those things, how do you begin to take that data to provide knowledge-based vertical information to somebody that helps them do their job easier. You want to make the good ones better, identify who the people that aren't performing, but making it to where they don't do as much administrative work and do the things where they need judgment and that type of stuff to make it a better experience for them. So we have several AI products that are -- we're testing with people right now. And we're excited to talk about it as we get a little further along on that road map.

It's more like you went where it was going to go, which is AI which is a big theme obviously. I don't know. Maybe people haven't heard of it, but when you talk to -- just on that question, because obviously, it's a slower burn what comes to financial services for regulatory and other reasons. But when you talk to bankers, is this something they're asking for? Obviously, there's a revenue component in terms of interacting with customers, helping them interact with customers. And then there's also a cost component too. So where are those conversations trending? Are bankers asking about it and where are they asking?

As Jonathan said earlier and I said it as well, is that this is the most conservative group of people arguably in the world. And so a lot of the conversations are starting with the risk and compliance team. To understand what you're doing, where the data is coming from, how you're using it, what's happening with their data, so you've got to start with that with our customers. But just like us, we're beginning to figure out how we're going to use CoPilot in Microsoft to be more effective. We're thinking about Salesforce. How are we going to use it? . So there's many different areas, whether it's just running your business or interacting with customers. And so they are all -- many of them are engaged in these conversations and a lot of them are waiting to see what's going to happen, but it's top of mind at board meetings, leadership meetings. And they're reaching out to us because we are the most strategic provider in the financial institution for the technology. And so we have to be out front with it. We have to be solutions oriented, but we also need to think about risk and compliance something that goes along with that because that's how they live their life.

And I know you've been working on AI for many years. It's not anything that's new, but obviously, Gen AI presents a different component. So -- but we're out of time. It's been a great conversation. Thank you, Matt. Thank you, Jonathan. Thanks, Josh. Really appreciate it.

Thank you.

Thanks for joining.

Thank you.