Q2 Holdings Inc
NYSE:QTWO
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Q2 Holdings Inc
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Good day, my name is Jack, and I will be your conference operator today. At this time, I would like to welcome, everyone to Q2 Holdings First Quarter 2018 Results Conference Call. [Operator Instructions] Bob Gujavarty, Vice President of Investor Relations. You may begin your conference.
Welcome to the Q2 holdings conference call for the first quarter ended March 31, 2018. 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 you have not, it is available on the Investor Services section of our website. Let me also highlight our participation in several investor events this quarter. We'll be in attending the Needham Emerging Technology Conference in New York and the Stifel Cross Sector Insight Conference in Boston.
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 Relations 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, a reconciliation is not available on a forward-looking basis without unreasonable effort. Now let me turn the call over to Matt Flake.
Thanks Bob. Today I'd like to discuss some business highlights for the first quarter 2018. I'll then turn it over to Jennifer, who will provide a more detailed look at our first quarter financials and provide guidance for the second quarter and full year 2018. In the first quarter, we generated revenue of $54.8 million, up 23% year-over-year, and 6% sequentially. We added more than 500,000 users ending the quarter with approximately $10.9 million registered users, up more than 22% year-over-year. We recently completed our annual client conference CONNECT and later in the call, I will provide some updates from the event. But first I would like to highlight our sales execution in the first quarter. We had one of our best performances in what is a typically seasonally slow quarter. In February, I mentioned my confidence in our pipeline and our ability to convert the pipeline too bookings. Our performance in the quarter was encouraging and I was particularly pleased with the breadth of deals we signed in the quarter with no worthy wins from all markets. Bank, credit union, cross sales, and Q2 Open. We had strong execution in Tier 1 space to end last year and we added 2 additional Tier 1 banks in the first quarter. I'm particularly pleased with the improvements we are seeing in the bank market multiple factors including tax reforms, improving interest rates, and anticipated regulatory relief have community financial institutions feeling confident about investing in the digital channel. And these conditions appear to be a contributing factor to our momentum. One of the banks we signed in the quarter is the $7 billion institution located on the West Coast. In the last few years, the bank's legacy vendor has sold their online banking system to one of the major core providers in the space. Based with uncertainty about the future of their online banking system, the bank began an end-to-end evaluation for a modern platform that they could use for years to come. In this case, our single platform brought unique value to this particular bank. Because they serve a mix of retail and business customers including a large segment of high network individuals, the bank felt the ability to seamlessly serve and up sell their customers from a single platform was fundamental to their growth. Leading them to select our platform for a full replacement of their retail and business banking systems. The bank also sided our alignment with their mission and culture as a key driver of their decision. I believe our strong bookings performance is partially a function of our ability to successfully deploy our products. I want to take a moment to thank our delivery teams for their continued execution. In what is usually a slow quarter for go live the operations team added over 500,000 users no easy feat, as the, we built this business with focus on customer experience and the tireless work of our operations teams is what we believe create happy reference-able clients. I will round out my prepared remarks by providing some color on CONNECT, our annual client conference, which we just concluded in early April. This year attendance from clients and prospects was up 25% from last year. Representing a majority of our client institutions and marking another year of record attendance. As I've said in the past, our conference is the best opportunity we have to connect with the majority of our clients at once. And to get their influence on our strategic direction. This year, the overwhelming sentiment was positive. The market conditions are referred to earlier are leading clients to be more optimistic, which we believe will translate to more investment in the digital channel. And speaking with clients, I was struck by the growing role, we play in serving them. As we continue to expand our product portfolio and fold in strategies around open technology, design thinking and using data to create financial experiences, our clients increasingly view us not merely as a vendor but as a strategic partner. Charged with helping shape their forward-looking digital strategies. As a result, I believe we are as aligned with our clients, as we have ever been and I remain optimistic about the opportunity we have ahead of us. With that, I'll hand the call over to Jennifer for a detailed discussion on our financial results.
Thanks Matt. I will briefly review our results for the first quarter before finishing with updated guidance for the second quarter and full year 2018. As a quick reminder, our 2018 results and updated guidance reflect the adoption of ASC 606, which we adopted using the modified retrospective method. Therefore, 2017 results have not been adjusted such that the year-over-year comparisons for revenue and certain expenses do not reflect it to apples-to-apples comparison. Total, revenue for the first quarter was $54.8 million, an increase of 23% year-over-year, and up 6% from the previous quarter. The adoption of ASC 606 added approximately $2 million to first quarter 2018 revenue. Driving the majority of the sequential increase. Approximately, 50% of that amount was timing within the quarters of 2018, as we were able to pull forward recognition of revenue from buyout payments, related determinations that are scheduled to occur later in the year. With the remaining amount being related to the pull forward of annual price escalators in our contract and license revenues from various Centrix products, which were deployed on premise. Transaction based revenue and actual dollars was up slightly from the previous quarter and represented 16% of total revenue in the first quarter consistent with the prior year. As we turn to gross margin and operating expenses, please note that unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis. Gross margin was 54.3%, up from 52.5% in the first quarter of 2017 and 52.7% in the previous quarter. The year-over-year and sequential improvement was largely the result of higher revenue due to the adoption of ASC 606. The approximate $2 million of revenue recognized under ASC 606 had very modest incremental cost, given the majority of it was merely timing of the revenue recognition. Total operating expenses were $27.3 million, up 12% from 1 year ago but up only 6% from the previous quarter. The year-over-year increase was largely due to higher headcount while there sequential increase reflected higher headcount as well as seasonal factors such as payroll taxes associated with annual bonus payments. Sales and marketing benefited approximately $300,000 due to the adoption of ASC 606, as we are now able to capitalize more of our commissioned expense to be amortized over the expected period of customer benefit. Adjusted EBITDA was $5 million, up from $1.1 million in the year ago period. The improvement was driven primarily by the higher revenue and gross margin resulting from the adoption of ASC 606, as well as continued leverage in our operating expenses. We ended the quarter with cash, cash equivalents and investments of $294.1 million, up from $99.6 million at the end of last year. Cash flow from operations for the first quarter was negative $7.1 million, driven largely by the timing of our annual bonus payout. And we incurred net capital expenditures of $5.4 million. In February, we raised approximately $224 million net of fees from the sale of convertible notes. And currently with the offering of convertible notes, we entered into separate convertible bond hedge and warrant transactions to reduce potential dilution to our stock upon conversion. The company utilized $41.7 million of the proceeds, to purchase the bond hedge, which was partially offset by $22.4 million in proceeds received from the sale of the warrant. We expect interest expense including the amortization of discount and issuance costs related to the convertible note to be approximately $2.9 million per quarter on a go-forward basis, which will be partially offset by any interest income earned on a higher cash balance. With the adoption of ASC 606, we will begin reporting backlog, which reflects contractually committed revenue over the remaining contract term for all current contracts. As of March 31, 2018, backlog was more than $750 million. I would note the sequential decline in the deferred revenue was almost entirely related to the adoption of ASC 606 and the netting of contract assets and liabilities. Let me now turn to our updated guidance.
We forecast second quarter revenue in the range of $57.9 million to $58.5 million and full year revenue in the range of $236.5 million to $238.5 million, representing 22% to 23% year-over-year growth. We forecast second quarter adjusted EBITDA of $4.7 million to $5.3 million and $21 million to $23 million for the full year 2018.
Our Strong bookings performance over the last 6 months will require a modest incremental investment and implementation capacity. However, we remain on track to generate positive free cash flow for the full year 2018.
Finally, I want to take a moment to thank my finance and accounting team for the countless hours they have spent transitioning to the new ASC 606 revenue recognition and reporting standards. It has been a tedious exercise and I thank you all for your time and attention to detail. Now let me turn the call back over to Matt, for his closing remarks.
Thanks Jennifer. In closing, Q1 was a great quarter. Our sales performance was broad-based with wins across all segments. Strong user growth and solid execution. In addition, it was great to connect with our customers and our annual client conference and I want to thank all of them for their continued support and partnership. I believe our missions are well aligned and their enthusiasm about our strategic direction should ensure mutual success. Between market conditions and the breadth of our products suite, I feel 2018 it will be another great year for Q2. Thank you, and with that, I'll turn the call back over to the operator for questions.
[Operator Instructions] Your first question comes from the line of Sterling Auty with JP Morgan.
Question on the Jackson Ader on for Sterling. Questions on the West Coast deal, Matt you mentioned in your prepared remarks, do you think that if we rewind maybe a couple of years before you made drive into the business banking space, you think Q2 still win this business without your corporate capabilities? And maybe that -- this client would have selected Q2 on the retail side then going another solution for their corporate?
Well, actually in full disclosure, these guys were a customer of mine back in late '90s. Now, I've got relationship with them for almost 20 years. So I guess, with that question the answer would be we wouldn't have won it because we've been trying to win it for a while. I do think, they are slow movers they are very conservative. But I do think our Corporate Banking functionality helped. I think where they were in the life of the product they were on, there would've probably gone with our retail small business and look for another Corporate Banking product. But with the time and energy we put into the Corporate Banking, I feel like it was a slam down this time. So we are really excited to have them on and look forward to 20-year relationship with them hopefully.
Got you. And then the other large wins in the quarter, can you give us a sense for whether they were retail, corporate or business banking or both?
The other Tier 1 was a Corporate Banking opportunity and then the rest were mixes. The credit union is largely leaned towards retail and the Community Banks that we signed were a mix of retail small business and what we call corporate light, which is a little bit lighter version of the main corporate product. So a nice mix. Like I said, we are really happy with, we had really good balance probably 60-40 between banks and credit unions. More banks than credit unions, which hasn't been a case for the last -- in the first half of '17 crossed it well, Q2 open really executed so just a really solid quarter especially for a quarter that's usually not that strong.
Your next question comes from the line of Terrell Tillman with SunTrust Robinson Humphrey.
I guess, the first question Matt, it has become a pass-time for me to ask about Q2 open, so I should continue with that. I could see it a kind of as a hedge, in terms of how big this nontraditional bank market plays out. So you want to have a play in that. But it feels like this is becoming more than just kind of call option or a hedge. I'm just kind of curious where you are in terms of monetizing this and how big this could be in relationship to the rest of the business?
Yes, we are still early. But if you think about it the last 4 quarters we've talked about we signed capital , we signed bank, we signed Acorns, we just talk about money line. And those are all the ones we singed, those are just the ones we disclosed.
It's continuing to gain momentum. The things we like about the business are we could turn it on in 90 days, margins are very high for us. It gives us the ability to help our customers, the Community Banks, and credit unions to compete because we're actually when we signed many of these deals there was a partnership side with the bank to take deposits on the other end. But when I think about 2018, it's less than 5% of the revenue guide. But I think you're going to start to see continued growth out of that business in 2019 and '20. So, yes it's not just a hedge for us. It's a real opportunity, we are investing in heavily, allocating resources. We've made a lot of hires there and we're going to continue to invest in it as we move forward. So one of the things that was when I look at the pipeline moving forward, almost 50% of the platform deals have opened as a cross-sell opportunity, whether is Biller Direct, CardSwap or the CorePro product. So just start to integrate those products into the platform sales and then also having our group out there selling the fintech is really encouraging for us, and we are really excited about the opportunity.
And then Jennifer in terms of -- you had mentioned $750 million in backlog, that sounds like a really big number. Can you just give us an update what's the average contract duration? Is it reflected in that and how that $750 million compares to say the year prior or the end of last year?
Yes, Terry. So I would remind you that our average contract lengths are 66 months. So that backlog carries forward into the next 5 to 7 years. From a timing perspective, I would tell you that I would expect to roughly half of that to be recognized to revenue over the next 24 months.
Your next question comes from the line of Tom Roderick with Stifel.
So Matt, when you kind of look back at the last 6 months, I mean you guys have done a tremendous job particularly in Tier 1s and getting this bookings momentum going. I don't know if there is kind of a common threat to pull through some of these deals that you have undoubtedly been working on for a long time. I would love to hear, particularly now that you've got your user conference in the rear view, what are you hearing from the buyers out there in terms of why these decisions are finally starting to accelerate. And part of it could be rising interest rate environment, part of it could be just better economic environment, but there are certainly some technological changes underlying it and those buyers probably have to recognize and it's maybe now or never. Maybe you could kind of talk through some of the Tier 1 conversation. Tier 1 conversations you had and why this momentum has been picking up and be expected to kind of continue going for the rest of the year?
Yes, Tom. We -- the things you pointed out like regulatory change, tax reform, interest rates, those are all contributing to it. And I think, the sense of urgency we're seeing out of them really revolves more around market conditions. If you think about -- if you watch any TV, Bank of America, Wells Chase, they are all advertising technology as way to interact with them. You have FinTech like betterment, personal capital that are out there, pushing you to have user experience that's differentiated and begin to use technology as a way to plan financially or to borrow money. So that pressure is mounting on these community financial institutions. And then when they look at their existing technology, it doesn't talk to each other. The mobile doesn't look like the desktop, the commercial has a different login than the retail stuff. You could be a customer of a bank and have 4 different logins. To login into your application to see your kids accounts, your wife's accounts, your business accounts, mobile, phone tablets and desktops. And those experiences -- that's how the customer interacts with your brand. And it diminishes your brand and for people that rely on trust and integrity and when you're keeping somebody's money that matters. And so I think, that's really what's driving the sense of urgency around these decisions. And when you have the product that we have with the breath and the feature functionality, it's tough to compete with that. And then when we walk out to somebody and our message is pretty simple: you get a better user experiencing with the platform you become operationally more efficient you can consolidate 7, 8 platforms onto single platform once it upgrades, one system to administer. We're able to get you technology faster with a single set of code and then the promise of data, our Q2 SMART product has really taken off. Where 25% of our customers signed up for it. We are taking these people live in 2 to 3 months, we are starting to get actionable insights out of the data we are getting. So it's just really encouraging and I think that beyond the economy and the things that are having positive for the banks their pressure from competitors for them to do stuff. So that's the general theme we're hearing.
Follow-up question here Jennifer, I'm gathering if you never hear the phrase ASC 606 again it's probably too soon for you but here we are. If when we came into the year, I just want to make sure I am on the right page. So when we came in the year you guys were guiding on a 605 basis, and I think you had said kind of looking for 1% bump this year. So Q1 maybe a little bit above that. But can you just help us understand how within the context of your guidance we should think about 606 benefiting the numbers as we look at your second quarter numbers and the rest of the year? And then as it just relates to conversions, the accelerating or key conversions accelerating. Those were also preplanned and part of the discussion from last year, correct?
That's right, Tom. I still expect the overall impact to full year to be somewhere in that -- somewhere between 1% in 2% of revenue not material to full year. It was more material to Q1 because of the timing that you're talking about with the pull forward of determinations. So Under 605, we recognize those buyout payments when the customers actually de-converted off of the system under the new 606, it's a contract modification that basically now results in respreading all of that new revenue including the buyout over the remaining term from the time that termination was negotiated to the time they de-convert off the system. So roughly half of that $2 million upside that I mentioned in Q1 was really pull forward of Q2 and Q3 termination fees that we had planned in our original guidance just in a different quarter.
Your next question comes from the line of Mayank Tandon with Needham & Company.
Maybe for Matt or Jennifer, just curious in terms of the expectations you have for M&A in the market amongst smaller and medium-sized banks and the impact of accretion in your business given the favorable environment you called out Matt?
I think you're going continue to see M&A activity probably somewhere, which you saw last year. We haven't seen any numbers outside of what we anticipated. Our current numbers are still less than 5% for 2018.
Got it. And then I've a quick follow-up and for Jennifer, in terms of these large wins that you have which is obviously great to see, I would imagine there is a fair level of customization involved, which means that you might be stretching your professional services team. Is that fair to say and then if that is the case would you consider maybe partnering with SIs at the deemphasizing some of the internal professional services, which actually could then be positive for margins going forward?
I think, I mentioned in my prepared remarks, that you would see an that's why the full revenue guide didn't flow through to the upside on the adjusted EBITDA guide. I think you will see a bit more investment and amplifications capacity given our continued momentum. Whether, we can use SIs to do that is, that's just not very common in the industry. Especially, in the lower Tier 1 and the high end of Tier 2. And when you get to the larger Tier 1s, you might see some system integrators, the Price Waterhouse or somebody in play. But it's really on the bank side doing the project management piece for them. It's not -- they don't have the skill set to do the integrations and the customizations to the back end system that we have. So I don't think you're going to see that changing in the near future.
Yes, Mayank. I would add also that if I look at the last 9 Tier 1s that we signed over the last 3 quarters, there is less customization or highly configurable stuff in that batch than we signed in the previous years. That is a function of the breadth of the products the work we have done to create parity on the Corporate Banking side and then also remember we've roll out APIs and SDKs which allow the banks to do more the stuff on their own that they want to. So I feel really good about the last 9 that we signed. Also feel good about where the products are today as far as getting them more off-the-shelf than some of the work we had to do for some of the earlier Tier 1s to sign.
Your next question comes from the line of Brian Peterson with Raymond James.
Matt, just the commentary you referenced on the Tier 1 tray, such over the last few quarters, and obviously, the backdrop seems more favorable. I'm just curious, do you think about potentially accelerating some of your go-to-market or sales hiring plans given that backdrop?
I think, what we've talked about the past is we're going to continue hire that people where we need them. But really what -- the thing I've really been happy with is we brought on Travis Arthur who runs our marketing department and just focus on demand. Jenn has done a great job of driving more opportunities for us, more of the targets that we're trying to get. So, I'm really happy with what the marketing team has been able to do. We had an excellent CONNECT for customers. But we also had a tremendous amount and a lot of prospects that were there. So we're going to continue to monitor our coverage ratios but right now, I feel good about where we are, we'll add some here and there but I can make them happen faster necessarily now if the sense of urgency continues to pick up, we may need to do somethings but right now, I feel good about our coverage ratios, and after I really good about where we are from the marketing perspective. And he's only been here 6 or 7 months, and I think he's -- really has some wind in his sails and look forward to what you can do of the next 12 to 24 months.
And Jennifer, maybe one for you. I think the backlog metrics probably is going to garner a lot more attention from investors, so just want to make sure we're clear on this. What percentage of that is related to services, and I just wanted to be clear the transactional revenue component wouldn't be included in that number, is that correct?
You are correct that the transactional is not included in that number. Unless there happens to be a contract that has some minimum number of transactions that's committed by the customer, then that minimum committed fees would be in there. But the majority of the transactional revenue is not included in that. That's still considered transactional revenue that will be recognized as it's reported and incurred.
What about the services subscription mix for the rest of it?
Yes, the services is probably somewhere in the less than 10% range. Of the backlog $750 million that I mentioned roughly $700 million of that is subscription backlog.
Your next question comes from the line of Bradley Berning with Craig-Hallum.
If you guys have been obviously -- did a great job on innovation over the last number of years and you've talked to that strategic partnership role that you're moving into. Can you talk a little bit about what are your thoughts about your role in payment solutions for your customers. There's been obviously a number of initiatives by some of your competitors, whether it be partnerships with PayPal, Zelle other wallets, B2B, Alexa, et cetera. Can you kind of give us your thoughts about strategic road map of where you fit in payments?
Yes, so as we say we're not a payments company but we do initiate a lot of payments. So whether it's lease cost routing, or directing those payments to the bank and sell them on their own, those are opportunities for us. So we have a lot of flexibility in that way. For instance, on P2P, we partnered with first data but we're also talking with people about doing stuff with Zelle as an opportunity. Though we'll continue to find those whether it's bill pay or P2P, same day ACH payments, we handle a lot of payments. And so we kind of -- we believe that our neutrality helps us somewhat picking some of the best providers out there. But also, I will tell you whether it's our Biller Direct product, which is a way to augment or off-set some of the slowdown in bill pay that we're seeing by allowing end-users to go directly to Netflix, Amazon, Uber, to make their payments, we're seeing a lot of momentum there. That's technology that we built from the ground up, that allows people to go make those payments. Dealings in the CardSwap is not necessarily a payments tools but it is something that ties to the card so whenever you card get stolen it's away for you to replace it quickly where you don't have to go back to every single system to re-setup your card. So that's not a payment, it's tied to the card.
So we're neutral on payments, but we're involved in a lot of payments. I think last year we talked about, we did more than $600 billion in payments ran through the system. So becoming a payments processor kind of feels like that, that road has been paved, but figuring out which roads to put the payments on, or ways to drive down cost for our customers, make payments faster and more efficient is what we're looking to do.
Yes, understood. And then one follow-up question on that $750 million backlog. Just a couple of questions behind some of the assumptions on that. Are there any assumptions in there in the subscription revenues that include historical organic growth trends or cross-sell trends? And where does the new sales that are announced, but not implemented yet, fit into that $750 million number?
So there are no assumptions about organic growth. It's strictly the committed amounts in the contract. So there's not any excess user fees, there's not any variable cost. It's the committed minimum in the existing contracts. And as far as the new contracts that are signed, the committed minimum of those contracts that are signed but not yet deployed are included in that number.
Your next question comes from the line of Matt Hedberg with RBC Capital Markets.
I wanted to circle back, Matt, you made a comment earlier I thought it was interesting I think, it was 25% of customers signed up for SMART thus far. I'm curious, can you give us a sense for may be what sort of pricing uplift or how do you think about that benefiting the aCVO customer when SMART is added?
It's -- I would call it a reasonable up-sell from -- it's hard to say because it's asset based through the size of the financial institution. So it's hard to give you a general number. But it's a good sized up-sell, if you look at our cross-sells in the first quarter I think corporate, SMART and Centrix products were the top 3 cross sells. And so that's kind of the category it falls into. I don't really have a number to give you on the average, but we are seeing adoption of it, starting to get really good feedback how -- what's coming from it. I mean, initially it started with more of a communication tool with customers and then it moved to driving more usage of the product. We saw some customers last quarter that used it to drive cross-selling of corporate products or other products to their customers and then we had a couple of customers that were actually using it to go cross-sell their customers' products. We had a customer of ours in the South that had a Christmas tree farm that they banked. And they began to use that Christmas tree farm. They helped cross-sell Christmas trees to their customers through their online banking to help their customer drive revenue. So some really interesting things are coming out of this, that we think are unique and will help drive revenue for our customers, which will lengthen our contracts, extend our relationships and would be good for us.
And then maybe one for Jennifer. On the Q4 call, I think, you eluded the fact that with some of those 7 Tier 1 banks you signed last year in Q3 and Q4, you are still kind of more in the early planning phase. Trying to determine if some may go live in phases or more sort of big bank deployments. Now that you've got a little bit more time and obviously you signed another 2 more Tier 1s this quarter, any additional thoughts or updated thoughts on the potential rollout plans from some of those deals in Q3, Q4 of last year?
I think, we have identified a couple of the ones that were signed towards the end of last year where they bought the full platform and they've elected to go live with either the retail or the corporate piece first and then move the other in the second phase. So I do think there are a couple that have elected to go with phases for whatever reason that you may see some revenue from phase 1. It won't be the full revenue obviously. But some revenues from phase 1 that starts to hit the back half of 2018. The majority of the others I think are still either so late in '18 that they are not much of an impact or they the roll into 2019.
Your next question comes from the line of Peter Heckmann with Davidson.
I wanted to be if you could give a comment on win rate? Is some of the factors you're talking about that are buoying spending in the banking industry really seem to be benefiting all vendors? Even digital insight has been showing some pretty interesting increases in bookings. Do you feel like you continue to win the lion's share or greater than your current share of the Tier 1 opportunities that come to market? .
Yes, so In the Tier 1 and the Tier 2 space we still win more than 50% of the time. On the Tier 3 side, it's a little trickier because how we classify wins. We get in there early sometimes we qualify out. I don't have a good number for that. And I don't like -- I don't really like to share, but yes I would say that we are winning more than 50% of the deals. In the Tier 2, Tier 1 space, represented it by winning 9 deals in the last 3 quarters. Last 120 days of the year, last year we won 7 of them. So we feel really good in those deals.
Okay, that's great. And then just a couple of follow-up questions for Jennifer on a previous question. So the adoption of ASC 606, it's look like it accounted for the majority of the increase in the revenue guidance. But based upon capitalizing some expenses did it actually account for more than 100% of the increase in EBITDA guidance for the year?
No, it didn't account for more than 100% of EBITDA guidance. Because remember that a big chunk of like the Q1 overachievement was just a pull forward of revenue from the other quarters. So the biggest piece of the adjusted EBITDA overachievement in the first half was related to the approximately $2 million of incremental revenue but some of that as timing was in. So I think 50% of that is timing was in. So $1 million of the increase was related to the ASC 606, with the other $1 million part of it being probably 50% ASC 606, but the rest of operating leverage that we are seeing.
Okay, great. And then can you just -- can you give us a comparison on that backlog number with either the fourth quarter last year or the first quarter of last year. So you can give us an idea of how we can start tracking that?
We adopted using the modified retrospective method. So we actually do not have backlog as of this period.
Your next question comes from the line of Joseph Vafi with Loop Capital.
I was wondering, Matt, if you can give us perspective on Tier 1 pipeline at this point. I know you've blown through and won a lot of deals, and I was wondering if that pipeline stays robust or it's a little bit depleted. And then secondly on Q2 Open and I know it's still a little early but is a kind of consistent competitive landscape emerging there for that type of technology. I know a lot of FinTech players are coming at this part of the market from slightly different angles and with -- because they are evolved in different areas. And I was wondering if that's some start of the journey yet.
On a Tier 1 yes clearly we've cleared the decks somewhat. But I felt -- I feel really good we had quite a few Tier 1s at our client conference we're engaged with some of them. I would probably set expectations to say that you know probably later in the year you will see some more Tier 1s coming. But I feel good about the pipe and where we are in those. On the Q2 Open side, the competitive landscape it is all over the place. I mean you have got -- you are starting to see I think, FIS has something that they are getting into there, but there are players are all around that space. One of the things that -- we bought Social Money in December of 2015 and they have -- they really were able to start over from the ground up and build this stockbased core deposit processing tool and the thing I didn't understand that they have and they have some much tribal knowledge around these FinTechs, relationship with people. We talked about at the start press release stone castle, which is basically a deposit network for us to help distribute those deposits that these FinTechs take. So it is no one person I can tell you we compete with all the time. But the thing that I'm really happy about is we are engaged in so many of these. We've -- the team in Q2 Open has been talking with investors that are investing in these FinTechs and so we have a great pipeline that brings these deals in and I'm really happy with where Q2 Open is and I think the opportunity is really early innings and there is a long ways to go but I'm happy with the execution and on the sales side and then we've just got to continue to enhance the product and win these deals.
Your next question comes from the line of David Hynes with Canaccord Genuity.
I want to ask you, with all the recent success you had at the Tier 1 banks. I'm curious is it time to prospects. How do you manage time to live expectations. Does that become a selling hurdle at some point or I think you talked about the products becoming easier to implement. Does it feel like you can keep up with demand so that new customers don't really need to worry about that or just what are the puts and takes as you talk to prospects?
Yes, I think, we are very transparent with the prospects about -- there is a limited number of seats and you've got to sign up to get that seat and when you sign up, we'll start the project accordingly. Is Jennifer really sits over the top of Chris on the sales side and John Breeden on the delivery side to make sure that we have our capacity planning correct. So she will give a pipeline report, look at the percentage -- or what the close rates are going to be on them and then John who rigs implementations will come back and say I need this many people to absorb that. So we went through the early days of indigestion of not having that process. And I don't want to ever go through that again. So now with that process, I feel good about the way Jennifer runs it, and the way Chris and John work together on those problems. But we feel like we brought it out appropriately we have enough slots moving forward. Obviously, the implementations team is running with a lot of pressure on them to deliver what we did in the third and fourth quarter and then there is more coming. So I feel good about our capacity as we move forward in the way that the team works together to plan for it.
Okay. And then Jennifer, before your EBITDA guide, I mean generally in the past we've seen stronger profitability in the second half of the year. Guidance suggests this year, may be more of a linear ramp with EBITDA. I mean is that just because we had some pull forward of that, really high-margin revenue in the first half or is there anything different this year from kind of a spending pattern or is it incremental cost in the back half of the year to support these Tier 1 go lives or just help us think about the seasonality in EBITDA this year.
Yes, I think, it is going to be more linear this year simply because of ASC 606. And with the $2 million over achievement in Q1. I said half of that -- so $1 million of that was just a pull forward out of Q2 and Q3. And so when we set the initial guidance we had those termination agreements timed in those quarters, which provided more of a ramp in the back half of the year. Because you saw the investment for implementations capacity decreasing the margins in the first part of the year. But with that, timing impact of 606 it's really offset that so I expected to be a bit more linear this year.
Your next question comes from the line of Tim Willi with Wells Fargo.
This [ Chuck Nabb ] on from Tim Willi's team. I wanted to touch on the margin again. The increase this quarter was well above -- relative to your guidance last quarter. The increase was above the pace that you had, you guided us to. And I think, you might have touched on this in response to the last question in terms of pull forward in revenues. But I wanted to get a sense for number one, if the timing of any other go lives this quarter impacted the margin at all? And if you still think that we should be in that 60 to 100 basis point increase range in 2018?
The timing of the go lives did not impact the margin. The timing of go lives, I think were pretty much as planned, the margin improvement literally was the drop through of the revenue that was the benefit from ASC 606. So it was all timing. And I think I mentioned on our year-end call when I provided kind of the guidance for this year that I expected pre 606, I expected better than 60 basis points of last year but probably not better than 100. With the impact of 606 this year, I would now expect it to be probably be somewhere between 100 to 150 basis points improvement year-over-year.
And as a follow-up, I wanted to touch on your Tier 2 and Tier 3 clients. Some of your peers had alluded to an increased willingness among community banks to adopt newer technologies as well as a shift from in-house to outsourced solutions. And I wanted to get a sense if you're hearing anything consistently and what the pipeline looks like for those Tier 2 and Tier 3 clients as well?
Yes, I mean our whole story has been about pushing them to adopt new technology in the cloud. And I think probably these guys are here -- what the other competitors are hearing is that finally, regulators are beginning -- they have gone from why are you talking about cloud to why aren't you in the cloud. And so that's all freeing them up to do more of that. But we keep -- we continue to see that momentum as we have seen in the last 2 quarters. So yes, it was a great quarter. In all the Tiers like we talked about so Tier 1, Tier 2, Tier 3. But Tier 2 and Tier 3 or Tier 2 is at least has really been our bread and butter in this organization. We've built it with $1 billion to $10 billion credit unions in bank now many of those have grown up to be $20 billion financial institutions. I think I said on the last earnings call, I think we have more than 30 banks now that are greater than $10 billion in assets. Many of those have grown through acquisition. So what we tried to do in Tier 3 space is to target ones that are looking to grow, use technology as a way to compete and differentiate. And what happens is that means they're usually in growth mode so they are going out and making acquisitions. If somebody is just looking for a low-cost solution, they may not be in the game for a long term so I think that's why you see us come out on the right side of acquisitions when our customers get acquired. We acquire more -- our customers acquire more banks than we lose. So all those things are kind of inherent in how we've run the business for a long time. But the Tier 2, Tier 3 space is a great opportunity for us. And we continue to invest in it. That's where the majority of our sales organization is. We're going continue to target the right ones and win them.
Your next question comes from the line of Arvind Ramnani with KeyBanc.
With these larger wins, it is encouraging to see that you are able to deliver them with minimal customization given how your products are built now. Are you finding that your overall dependency on services is getting to be lower than it -- what it was 2 or 3 years back? And does it help your margins?
Well, I think the less work we have to do obviously it helps our margins but I think ultimately, there is still a lot of heavy lifting that goes on to get these systems implemented. You have go do -- you have to connect networks. You've got to configure the system the way that they want. You've got data migration and the larger the financial institutions the more data you have to migrate especially, when you're on the corporate banking side. And then large institutions do more phase, rollouts, they'll rollout customers for 6 months in some cases. So I think, as the product matures and you get more and more scale and more and more users on it, you will begin -- the margins will continue to improve through that. But from an implementations perspective, Jennifer, you can comment on whether it's same or improving?
Yes, I think we are seeing a slight improvement. The majority of the improvements that we are talking about 60 to 100, pre the impact of ASC 606, 60 to 100 basis points improvement is coming primarily from the implementations team and the efficiencies in scale that they are beginning to get.
Just a quick follow-up. Matt, last year when we talked you indicated that when you look at your pipeline you're most excited about the number of Tier 1s in the pipeline and you have certainly done a really good job converting that pipeline to clients. I mean, when you look out -- when you look at your pipeline now and when you look at over the next year or so what components of your pipeline are you most excited about? And where should we're really expect upside from?
Well just to be clear, I don't think I have ever said I am more excited about the Tier 1 than Tier 2 or Tier 3. I mean, the pipeline we taken up in the third quarter of last year after kind of what we went through in '16 was exciting for me. And like I said at the beginning of the call, we had a solid performance in credit union, bank, cross-sell open, the Cintrex products were flying off the shelves right now. I don't want to pigeon-hole myself into one or the other. The credit unions are doing great for us. The banks are doing great for us. Our products are really matching up for them well. I talked about Q2 SMART. I talked about Q2 Open more than 50% of the pipe has Q2 Open cross-selling it, up for the platform side things, I'm excited about the market conditions. I'm excited about where our products are. I'm excited about our customer's engagement that we just had, 45 days ago with the client conference. So I'm excited about the industry and where we are and I'm really proud of the company what we've done. I think we've got good things ahead of us as long as all these conditions stay the same.
Our next question comes from the line of Larry Berlin with First Analysis.
Just a quick one for you. Just curious what the pipeline looks like for R&D and for new products and what the focus is at this point?
Yes, so when we think about the product as we move forward. We are driving to more and more technology that allows our banks to gather data from their account holders whether they are customers or retail or commercial customers around. What they might be wanting to do, so things like gold based savings, somebody who says I'm saving money for a home improvement or home or college. Those are opportunity to cross-sell products. From a corporate banking perspective we are going to continue drive depths around functionality that allows our customers to go get larger corporate customers on their system. We are going to drive more integrations in the third-party systems so, for an example, that would be we've got quite a few customers that are -- that have property management firms that they bank. There's third-party software that property management firms use that we are integrating them into those with our APIs, so that they can use that data in a single-user experience. Q2 Open we're excited about Biller Direct, CardSwap and our CorePro application. So continue to invest in user experience, mobile, corporate functionality, security compliance offerings. And then data at the center of everything we do and we believe data -- the data storage started for us in 2009 around fraud analytics product. And now we enhanced that team to rollout Q2 SMART, other products that are around that. So there's a lot of opportunity for us we're still putting 18% of our revenue into R&D. There's a long ways to go to digitize the banking experience. And so we're really optimistic about it. And I'm really confident in our team's ability to deliver based on if you look at the last 10 years I don't know who's put more innovation in the ground than us that's up and running in production. So I'm really excited about the opportunities as we move forward.
There are no further questions. We'd like to thank you for your participation in the Q2 holdings' first quarter 2018 results conference call. This concludes today's call. You may now disconnect.