Q2 Holdings, Inc. Q1 2026 earnings call

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. With me on the call are Matt Flake, our CEO, and Jonathan Price, our CFO. This call contains forward-looking statements that are subject to significant risks and uncertainties, including, among other things, with respect to our expectations for the future operating and financial performance of Q2 Holdings and for the financial services industry. Actual results may differ materially from those contemplated by these forward-looking statements, and we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct.

Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our periodic reports filed with the SEC, copies of which may be found on the Investor Relations section of our website, including our quarterly report on Form 10-Q for the first quarter of 2026 and the press release distributed this afternoon and filed in our Form 8-K with the SEC regarding the financial results we will discuss today. Forward-looking statements that we make on this call are based on assumptions only as of the day discussed. Investors should not assume that these statements will remain operative at a later time, and we undertake no obligation to update any such forward-looking statements discussed in this call. Also, unless otherwise stated, all financial measures discussed on this call other than revenue will be on a non-GAAP basis.

A discussion of why we use non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which is available on the Investor Relations section of our website and in our Form 8-K filed today with the SEC. We have also published additional materials related to today's results on our Investor Relations website. Let me now turn the call over to Matt.

Thanks, Josh. Good afternoon, everyone. Thank you for joining us today. I'll start by sharing our first quarter results and highlights from across the business. I'll hand the call over to Jonathan to discuss our financial results in more detail and provide our outlook for the remainder of the year. Starting with the quarter, we delivered a strong start to 2026 with financial performance that reflects continued execution across our key priorities. In the first quarter, we generated revenue of $216.5 million, representing 14% year-over-year growth. We also delivered adjusted EBITDA of $60 million or 27.7% of revenue and generated Free Cash Flow of $44.2 million.

Overall, we're pleased with our performance to start the year, including continued strength in our subscription model, ongoing demand for the mission-critical solutions we deliver to our customers, and meaningful progress in our AI journey, which I will provide more detail on momentarily. Starting with sales, we had a strong quarter of bookings activity to start the year, building on the momentum we carried out of 2025 with a record bookings performance for our first quarter. Our performance was highlighted by nine total Tier 1 and enterprise wins across the portfolio. As we've seen in recent quarters, our bookings execution continued to be characterized by a balanced mix of net new and expansion activity as well. We saw particularly strong performance in both our digital banking and our risk and fraud solutions.

I want to highlight a few deals from the quarter that exemplify some of the themes that have defined our recent sales performance. First, we closed a significant digital banking expansion driven by an M&A transaction involving existing digital banking customer Synovus, who merged with Pinnacle Financial Partners. Following the merger, the combined institution selected Q2 as the go-forward platform for commercial digital banking and commercial fraud management solutions. We continue to view bank sector M&A as an opportunity for our business and an area where our platform strategy differentiates us. In scenarios like these, customers are making long-term strategic decisions, and we're proud to be selected as the platform of choice in a highly competitive and complex environments. Second, we also signed the largest fraud deal in our company's history in the quarter.

This was a win with a new enterprise customer and represents another example of the growing scale and importance of fraud solutions within our portfolio. As we've discussed in recent quarters, the cost and complexity of fraud continues to increase across financial institutions. What we're seeing now is that fraud is no longer episodic or confined to a single channel. It's becoming a continuous enterprise-wide challenge and one that is driving increasing levels of investment from our customers. This deal is particularly notable because of its size, and it marks another quarter where we've delivered a fraud booking of magnitude, reinforcing both the strength of our solutions and the urgency of this problem for our customers. From a sales perspective, we were very pleased with the breadth and quality of our bookings performance in the quarter.

We're seeing continued demand across our platform, strong engagement from both new and existing customers, and increasing alignment between our product portfolio and the strategic priorities of financial Institutions. Of note, we're also seeing the term length of expansion deals increase compared to historical averages, which we view as a signal of our customers' long-term commitment to us as the partner of choice as they navigate their AI and digital transformations. On AI, we announced two product sets in recent weeks, and I want to update you on our strategy and where we're executing. As we've discussed on prior calls, there are three key differentiators we see for Q2 in the current wave of AI innovation: data, distribution and incumbency and trust.

As AI lowers the cost of generating insights and writing code, we believe the value shifts towards platforms that can apply those insights in a trusted, compliant, and operationally sound way. That's where we believe the platform we've been building gives us a real advantage. First, on data. Last quarter, I described Q2 as the system of context for our customers. While the core processor is the transactional system of record, Q2 sits in the flow of every digital interaction, seeing every login, transaction, alert, message, and user decision. That gives us the context of behavior, not just ledger entries. We see login patterns, navigation paths, hesitations, retries, and the full path a commercial payment takes from initiation through approval to execution. We believe that's the kind of banking-specific context AI needs to be useful, and it's a meaningful differentiator for us. Second, on distribution.

We have an established customer and partner network ready to consume AI as we deliver it. That network took more than two decades to build and operate at scale, and it matters because AI is only valuable as the places it can actually be deployed. Lastly, on incumbency and trust. Our customers are coming to us for direction on AI because of the trust we've built with them over many years. Because AI and banking has to be highly secure and compliant from day one, we have the infrastructure, the technical know-how, and the long-term customer relationships needed to deliver bank-grade AI at scale. Our customers are eager to adopt AI, we have also seen an increase in customer conversations around the importance of managing data, privacy, and access.

Customers are turning to Q2 to help them work through this transition, and we believe that choice is continuing to show up in our bookings results as they make long-term strategic commitments to Q2 as their AI and digital transformation partner. Importantly, we are already converting those strategic advantages into tangible outcomes and innovation for our customers. Our near-term product focus is in three areas: improving efficiency for bankers, strengthening fraud detection and prevention, and driving deeper personalization for account holders. We announced two new products in those areas over the last few weeks. The first is Q2 Code, our AI-assisted development capability which improves efficiency. It embeds AI directly into the development experience, allowing customers and partners to build on our platform using natural language while leveraging the full power of our SDK. The second is a new set of AI-driven fraud capabilities focused on account takeover.

We're using AI to continuously monitor user activity, identify signs of compromise, and intervene in real time. That shifts fraud management from after-the-fact detection to real-time prevention inside the platform where the transaction is happening. Looking ahead, AI is moving toward more agentic models where systems take action on behalf of users. In financial services, that will require trust, transparency, and control. The platforms that win will combine context, execution, and compliance. We believe that Q2 is uniquely positioned to be one of them, and that we can capitalize on the value this creates for our customers. When you combine the progress we're making on our AI journey with our continued sales momentum, we're pleased with our start to the year. We believe that our sustained bookings performance, particularly coming off a strong second half of 2025, suggests that the demand environment remains healthy.

Even with the continued sales execution, our pipeline is strong, giving us confidence in our ability to continue executing in 2026. With that, I'll hand the call over to Jonathan to walk through our financial results in more detail and provide our outlook for the remainder of the year.

Thanks, Matt. We're pleased to announce first quarter revenue in line with the high end of our guidance and adjusted EBITDA meaningfully above. We also delivered record results across revenue, gross margin, and adjusted EBITDA. The strategic investments we've made over the past several years helped to drive our best ever first quarter bookings performance and reinforces our confidence in the durability of this model. With that, let me start by discussing our financial results in more detail, and I'll finish with our updated second quarter and full year 2026 guidance. Total revenue for the first quarter was $216.5 million, an increase of 14% year-over-year and 4% sequentially.

Our revenue growth was driven by subscription-based revenues, which grew 17% year-over-year and 5% sequentially, resulting largely from the delivery of new customer go-lives and expansion with existing customers. Subscription revenue as a percentage of total revenue continued to increase, ending the quarter at 83%, highlighting the ongoing shift in our revenue mix towards this higher margin revenue stream. Total non-subscription revenues increased by 3% year-over-year, driven by a 12% increase in services and other revenue, which benefited from higher professional services revenues primarily related to core conversions, as well as an easier comparison versus the prior year. These increases helped offset ongoing declines in more discretionary professional services offerings which remain under pressure.

Total annualized recurring revenue or total ARR grew to $945 million, up 12% year-over-year from $847 million at the end of the first quarter of 2025. Our subscription ARR grew to $802 million, up 14% from $702 million in the prior year period. Our year-over-year subscription ARR growth was largely driven by bookings from new customer wins as well as expansion with existing customers. Our total ARR growth remains below subscription ARR growth, driven by the trends we previously discussed related to non-subscription-based revenue. Our ending backlog of $2.7 billion increased by $46 million sequentially, or 2%, and $444 million year-over-year, representing 19% growth.

The year-over-year and sequential increases were supported by booking success across new expansion and renewal activity. As we have mentioned previously, the sequential change in backlog may fluctuate quarter to quarter based on the renewal opportunities available within that quarter. Gross margin was 62.1% for the first quarter, up meaningfully from 57.9% in the prior year period and 58.6% in the previous quarter. Both the year-over-year and sequential increase in gross margin were primarily driven by the completion of our cloud migration in January, as well as an increasing mix of higher margin subscription-based revenue.

Total operating expenses for the first quarter was $81.7 million, or 37.7% of revenue, compared to $77.2 million, or 40.7% of revenue in the first quarter of 2025, and $78.9 million, or 37.9% of revenue in the previous quarter. The year-over-year improvement in operating expenses as a percent of revenue reflects scaling primarily within sales and marketing and G&A. Total adjusted EBITDA was a record $60 million in the first quarter, up 47% from $40.7 million in the prior year period, and up 17% from $51.2 million in the previous quarter.

Adjusted EBITDA margin was 27.7%, expanding approximately 630 basis points from 21.5% in the prior year quarter, and up approximately 310 basis points from 24.6% compared to the fourth quarter. The year-over-year and sequential improvement was driven by a combination of the completion of our cloud migration and revenue growth. We ended the quarter with cash equivalents and investments of $379 million, down from $433 million at the end of the previous quarter, driven by the repurchase of $97 million of our stock in the open market in the quarter for a total of $102 million repurchased to date against our $150 million authorization announced in November 2025.

We generated cash flow from operations of $56 million in the first quarter, driven by timing of annual invoicing, collections and overall profitability, and delivered $44 million of Free Cash Flow. Let me finish by sharing our second quarter and full year 2026 guidance. We forecast second quarter revenue in the range of $214 million-$218 million, and full year 2026 revenue in the range of $875 million-$882 million, representing year-over-year growth of approximately 10%-11%. We continue to expect subscription revenue growth of at least 14% for full year 2026. We forecast second quarter adjusted EBITDA in the range of $57.5 million-$60.5 million.

Full year 2026 adjusted EBITDA in the range of $237 million-$242 million, representing approximately 27% of revenue. In summary, we delivered strong results to start the year, finishing at the high end of our revenue guidance, while also driving significant profitability expansion above our guidance. This performance, coupled with our outlook for the remainder of the year, has given us the confidence to raise our full year guidance on both revenue and adjusted EBITDA for 2026. We intend to continue to execute on our profitable growth strategy by balancing investments to sustain durable subscription revenue growth and drive operating leverage over time, while prioritizing effective capital allocation. With that, I'll turn the call back over to Matt for his closing remarks.

Thanks, Jonathan. I'll close by stepping back and putting the quarter into perspective. We're pleased with our performance in the first quarter, which reflects a strong start to the year across both financial results and bookings execution. We're seeing continued demand across our major product areas, including digital banking and risk and fraud. That demand is showing up in both new customers, wins, and meaningful expansion with our existing base. As we highlighted earlier, expansion continues to be a defining characteristic of our business. Our customers are increasingly choosing to deepen their partnerships with Q2 as they look to address some of their most important priorities. One of those priorities is AI, where we are continuing to execute against the strategy we outlined last quarter, embedding new capabilities like Q2 Code and our latest fraud innovations directly into the platform to deliver real measurable value for customers.

As we look ahead, we do so with a strong pipeline, a durable business model, and a clear strategy for continued execution. We remain confident in the demand environment and in our ability to deliver profitable growth while continuing to invest in the areas that matter most for our customers and our long-term success. With that, operator, let's open the call for questions.