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Q2 Holdings, Inc. (QTWO) Q4 2022 Earnings Call Transcript

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Q2 Holdings, Inc. (NYSE:QTWO) Q4 2022 Results Conference Call February 21, 2023 5:00 PM ET

Company Participants

Josh Yankovich - Investor Relations

Matthew Flake - Chief Executive Officer

David Mehok - Chief Financial Officer

Jonathan Price - EVP, Emerging Businesses, Corporate & Business Development

Conference Call Participants

Andrew Schmidt - Citi

Alex Sklar - Raymond James

Charles Nabhan - Stephens

Joe Vruwink - Baird

Robert Napoli - William Blair

Terry Tillman - Truist Securities

William McNamara - BTIG

Operator

Good afternoon, everyone. My sanction is Lisa, and I will beryllium your convention usability today. At this time, I would for illustration to invited everyone to nan Q2 Holdings Fourth Quarter and Full Year 2022 Financial Results Conference Call. [Operator Instructions].

I would now for illustration to move nan telephone complete to Mr. Josh Yankovich, Investor Relations. Sir, please spell ahead.

Josh Yankovich

Thank you, operator. Good morning, everyone, and convey you for joining america for our 4th fourth and afloat twelvemonth 2022 convention call. With maine connected nan telephone coming are Matt Flake, our CEO; David Mehok, our CFO; and Jonathan Price, our Executive Vice President of Emerging Businesses, Corporate and Business Development.

This telephone contains forward-looking statements that are taxable to important risks and uncertainties, including pinch respect to our expectations for nan early operating and financial capacity of Q2 Holdings. Actual results whitethorn disagree materially from those contemplated by these forward-looking statements, and we tin springiness nary assurance that specified expectations aliases immoderate of our forward-looking statements will beryllium to beryllium correct.

Important factors that could origin existent results to disagree materially from those reflected successful these forward-looking statements are included successful our periodic reports revenge pinch nan SEC. Copies of which whitethorn beryllium recovered connected nan Investor Relations conception of our website, including our yearly study connected Form 10-K revenge today and consequent filings and nan property merchandise distributed this day regarding nan financial results we will talk today.

Forward-looking statements that we make connected this telephone are based connected assumptions only arsenic of nan day discussed. Investors should not presume that these statements will stay operative astatine a later time, and we undertake nary responsibility to update immoderate specified forward-looking statements discussed successful this call.

Also, unless different stated, each financial measures discussed connected this telephone will beryllium connected a non-GAAP basis. A chat of why we usage non-GAAP financial measures and a reconciliation of nan non-GAAP measures to nan astir comparable GAAP measures is included successful our property release, which whitethorn beryllium recovered connected nan Investor Relations conception of our website and successful our Form 8-K revenge pinch nan SEC this afternoon. We've besides published further materials related to today's results connected our Investor Relations website.

Let maine now move nan telephone complete to Matt.

Matthew Flake

Thanks, Josh. I'll commencement today's telephone by sharing our 4th fourth and afloat twelvemonth results and highlights from crossed nan business. I'll past manus nan telephone complete to Jonathan to springiness you much insights into nan emerging businesses statement he oversees. David will past talk our financial results successful much item arsenic good arsenic guidance for nan first 4th and afloat twelvemonth earlier I reason pinch a look up to 2023.

In nan 4th quarter, we generated non-GAAP gross of $146.7 cardinal up 11% year-over-year and up 1% sequentially. We generated adjusted EBITDA of $8.4 million, representing 6% of non-GAAP revenue. As mentioned successful our property release, we had a communal termination of a statement successful nan 4th pinch an world replacement finance customer, impacting gross by $3.1 cardinal and adjusted EBITDA by $3.9 million. David will further talk nan effect that this had connected our financial results, but I want to stress that this result will positively lend to separator description successful 2023. Outside of this impact, I'm pleased pinch nan beardown financial results from nan quarter.

With that, fto maine commencement by looking backmost astatine 2022. Rising liking rates, precocious ostentation and different world power has created a analyzable operating situation that impacted communities our customers and Q2. Even successful nan look of an uncertain economy, we executed good crossed nan company, and our capacity demonstrates nan resiliency of our business exemplary and why we judge we're positioned to present charismatic maturation pinch meaningful profitability description going forward.

First, we person a mature differentiated merchandise portfolio that allows america to seizure exertion walk connected some nan deposit and lending broadside of a financial institution's equilibrium sheet. We judge this gives america a important addressable marketplace and positions america to upwind cyclical changes successful nan banking industry. Like successful nan existent rising complaint situation wherever financial institutions are prioritizing deposit maturation and managing fluctuations successful indebtedness demand.

Second, nan bulk of our gross comes from our integer banking contracts, which are mostly subscription-based, higher separator and person an mean magnitude of complete 5 years. So successful spite of caller headwinds wrong transactional gross and slowing discretionary walk from our -- from immoderate of our customers, nan immense mostly of our gross is resilient, higher separator and predictable, and nan request for our solutions remains strong.

For nan afloat year, we added 14 Tier 1 and 5 endeavor customers crossed nan portfolio, exiting nan twelvemonth pinch much than 1,400 customers and complete 40% of nan apical 100 largest U.S. banks and in installments unions are utilizing astatine slightest 1 of our solutions. And erstwhile you look astatine our bookings capacity successful nan past 2 quarters alone, it's clear to america that nan financial institutions are continuing to prioritize integer transformation, a cardinal logic we judge our subscription gross maturation will accelerate successful 2023. And finally, we've been capable to quickly accommodate to nan changing economical situation and position ourselves to thrust accrued profitability.

In nan 3rd 4th of 2022, we began to mean our hiring, much efficaciously leverage our world workforce and rationalize definite business units, each to thrust attraction connected our halfway strengths and highest return finance opportunities. In doing so, we delivered grounds free rate travel successful nan 4th fourth and we judge we tin present meaningful improvements to adjusted EBITDA and rate travel successful 2023 and beyond. Before I dive into nan 4th fourth successful much depth, I want to stock a fewer cardinal highlights from nan afloat year.

First, we supported customers done grounds levels of integer engagement successful 2022 pinch much than 4.6 cardinal logins to our integer banking level and our narration pricing solutions were utilized to negociate complete $1 trillion successful loans and $500 cardinal successful deposits. We besides provided grounds strategy readiness and information for our customers and continued to present meaningful merchandise invention passim nan year, pinch various aspects of our portfolio recognized arsenic best-in-class by nan likes of IDC, it -- and Javelin connected nan emerging businesses side, we gained important traction pinch customers and partners for Q2 Innovation Studio, our award-winning package improvement kit and partner ecosystem. Consequently, it's now consistently cited arsenic a cardinal driver and differentiator successful some nett caller and description opportunities.

And nan Helix embedded finance squad successfully navigated done a analyzable fintech backdrop, signing customers successful caller verticals, securing cardinal renewals pinch immoderate of our largest customers and supporting nan motorboat of important customer programs. And finally, arsenic I alluded to a infinitesimal ago, we had coagulated income execution passim nan twelvemonth crossed our merchandise portfolio, and our bookings capacity improved pinch each quarter, culminating successful a record-setting 4th fourth that I'll dive into now.

Our income capacity was beardown successful Q4, some successful position of measurement and breadth. We added nan highest number of caller customers successful nan 4th since earlier nan pandemic. And successful position of booking value, it was nan largest income 4th successful institution history. On nan integer banking side, specifically, we had a number of cardinal wins, including a nett caller Tier 1 and nan summation of respective Tier 2 and 3 customers. I was peculiarly pleased pinch our capacity successful nan Tier 2 space, which has historically been nan saccharine spot of nan business.

In fact, our largest booking from nan 4th came from a Tier 2 slope that contracted for our end-to-end integer banking suite to service its full customer base, including unit and commercial. I item this woody because nan expertise to service some unit and commercialized customers from a azygous level continues to create a competitory differentiation for us. Because of nan breadth of products included, this woody much intimately resembles nan bookings effect of a Tier 1 customer. And arsenic an illustration of really we've been capable to turn nan mean income value of our integer banking deals by complete 80% wrong nan past 5 years.

Additionally, astir each of our integer banking deals from nan 4th included aliases were driven by our commercialized functionality. Commercial Banking inherently presents analyzable needs that require move solutions and our years of investments successful our modern commercialized offerings person positioned america up of nan curve, particularly successful this macro situation wherever financial institutions are looking to turn their deposit guidelines thrust fee-based income and service clients much costs efficaciously done their commercialized portfolios. Shifting to nan lending side. We signed respective deals crossed indebtedness origination and narration pricing, including 2 Tier 1 and 2 endeavor clients. As usual, these deals came from a operation of nett caller cross-sell and description wins.

Although debased origination volumes are slowing, our narration pricing devices support respective captious usage cases for commercialized bankers beyond conscionable pricing caller loans. Today, our clients usage our narration pricing products to reprice and optimize their existing indebtedness portfolios and moreover to value their treasury and deposit services. So moreover successful a rising complaint situation wherever lending volumes whitethorn beryllium pressured and financial institutions are prioritizing maturation successful different areas specified arsenic deposits, we judge we're good positioned to make continued request based connected our differentiated solution set. Our emerging businesses besides had a coagulated quarter, rounding retired a beardown year. We are excited astir nan investments we've made to span valuable partnerships betwixt financial institutions and nan exertion ecosystem surrounding them. And we're pleased to spot this broadside of nan business proceed to scale.

So now I'll manus nan telephone complete to Jonathan to talk done these highlights successful much detail.

Jonathan Price

Thanks, Matt. I'm highly proud of nan effect our emerging businesses had successful nan 4th fourth and successful 2022 overall. I'll commencement pinch Q2 Innovation Studio highlights earlier shifting to Helix, our embedded finance business. At a precocious level, Q2 Innovation Studio is our award-winning package improvement kit and broad partner ecosystem that allows customers and 3rd parties to easy create and merge wrong our integer banking platform. In doing so, it helps our customers present caller invention quickly, thrust deeper engagement and differentiation and adhd caller fee-generating products to their integer offerings. 2022 was nan first afloat twelvemonth successful marketplace for Q2 Innovation Studio, and its early traction leads america to judge that it will beryllium a cardinal contributor to our maturation and improved profitability going forward.

First, Q2 Innovation Studio has proven to beryllium a sizeable differentiator for our integer banking platform, playing a captious domiciled successful our onshore and grow strategy. In 2022, it was cited arsenic a cardinal driver of complete 80% of our nett caller integer banking wins. We besides saw important take pinch existing customers. In nan 4th fourth alone, we had complete 20 existing financial institution customers adopt Q2 Innovation Studio, and we exited nan twelvemonth pinch complete 2/3 of our integer banking customer guidelines leveraging it.

Second, we judge Q2 Innovation Studio helps thrust engagement and stickiness pinch our customers. Our ample partner ecosystem enables financial institutions to adhd a immense array of unsocial integer solutions to their platform, that embeds them much profoundly into nan financial journeys of their user and business customers. The much solutions customers add, nan much integral our integer banking level becomes for them and their relationship holders. And arsenic hundreds of our customers and their millions of extremity users progressively leverage this partner ecosystem, we judge Q2 Innovation Studio has nan semipermanent imaginable to positively effect our wide churn rate.

And finally, by opening up our level to customers, improvement partners and third-party exertion providers Q2 Innovation Studio creates an ecosystem successful which each participants tin thrust meaningful merchandise invention crossed our integer banking platform. As of nan extremity of 2022, we person much than 1,000 outer developers coding to Q2's integer banking platform, much developers than our full engineering organization.

During nan 4th quarter, we added different 12 exertion partners, meaning we now connection much than 100 pre-integrated solutions done Q2 Innovation Studio. And we're starting to spot overmuch deeper utilization. Since its launch, customers signed much than 400 partner applications from Q2 Innovation Studio for their integer banking environments. And arsenic our customers proceed to adopt and utilize these caller solutions, we participate successful a usage-driven gross share, which we expect to thrust higher separator gross for nan business complete nan agelong term.

We built a beardown instauration successful 2022. We now person a robust best-in-class partner ecosystem. A immense mostly of our integer banking customers person Q2 Innovation Studio successful place, and they are progressively deploying these third-party exertion applications to their relationship holders. And arsenic we've accrued our attraction connected profitability, this caller exemplary is evolving really we innovate, giving america a powerful measurement to present merchandise invention costs efficaciously done nan integer banking platform.

So successful 2023, we expect to spot much of Q2 Innovation Studios semipermanent imaginable statesman to materialize for our business. Now I'll move complete to Helix, our embedded finance business that enables fintechs and brands to connection banking products to their customers directly. We began 2022 by launching nan Helix marque successful February, and complete nan people of nan year, nan motorboat proved successful successful driving consciousness of nan platform, establishing merchandise differentiation successful nan marketplace and meaningfully increasing our pipeline. But 2022 wasn't without its complexity. The changing system and shifting marketplace expectations drove galore fintechs and brands to quickly reprioritize their strategies distant from maturation and towards driving profitability, which successful move created uncertainty successful nan request environment.

In spite of a challenging backdrop, we executed good crossed nan business, and location are respective cardinal aspects of our exemplary that we judge position america for occurrence successful this caller paradigm. First, our go-to-market strategy is focused connected large, established companies and not conscionable fintechs, but awesome brands successful verticals for illustration insurance, wealthiness guidance and retail. As a result, our customer and gross guidelines are chiefly comprised of larger organizations that person been committed to their embedded finance strategies and are comparatively much insulated from cyclical changes successful marketplace conditions. And passim nan year, we secured strategical semipermanent renewals pinch our largest customers.

One of nan wins successful nan 4th fourth was pinch an existing Helix customer that was acquired by a overmuch larger brand. And aft owning nan business for a fewer months, nan acquiring institution decided that Helix was nan correct embedded finance supplier to support nan strategical statement of business done a caller shape of growth, and they signed a multiyear renewal.

Securing semipermanent renewals is captious for a fewer reasons, particularly successful this climate. It demonstrates nan client's committedness to their Helix powered programs successful spite of economical conditions, and it gives america nan opportunity to proceed increasing pinch them. Second, we person a demonstrated way grounds of helping our customers thrust some gross and profitability. And successful 2022, successful consequence to shifting marketplace dynamics I mentioned previously, we quickly launched caller functionality designed to thief customers thrust much profitable and sustainable programs, including personalized admin capabilities to facilitate collaboration betwixt our clients and their partner banks, granular paper controls that thrust personification engagement and enhanced fraud prevention to curb fraud losses.

And finally, we judge our expertise to support ample customer programs astatine standard will stay captious to nan fintechs and brands we target. Through respective important customer launches pinch immoderate of nan largest fintechs and brands successful nan United States, we now support complete 13 cardinal extremity users connected nan Helix platform. In closing, 2022 was a twelvemonth wherever we renewed multiyear agreements pinch Key Helix clients, our merchandise differentiation successful nan marketplace became clearer and nan pipeline was strengthened. And while marketplace challenges remain, I judge Helix is good positioned to navigate this situation successfully successful 2023.

Thank you. And pinch that, I'll manus nan telephone complete to David for a elaborate look astatine our financial results.

David Mehok

Thanks, Jonathan. Before I statesman much elaborate commentary connected our financial results, fto maine first supply immoderate explanation and quantification astir nan effect observed successful nan 4th from nan statement termination Matt antecedently mentioned. The results of this termination were a simplification of $3.1 cardinal successful gross related to nan statement plus and outstanding receivables equilibrium successful summation to astir $700,000 of costs of income expenses and $160,000 of operating expenses from antecedently deferred commissions. As a result, nan nett effect is simply a simplification to adjusted EBITDA of astir $3.9 cardinal for nan quarter. I will talk our financial results and wherever appropriate, statement nan effect to our results from this termination. We are besides factoring successful nan affirmative effect this improvement will person connected our margins and our 2023 outlook, fixed this engagement was dilutive to our wide separator profile.

Focusing our efforts and resources connected separator accretive maturation opportunities is an important facet of our outlook. As we look to optimize for profitable maturation going forward. Moving to our results. We're encouraged by nan continued marketplace request for our solutions, our booking occurrence and nan efficiencies we're driving, which are positioning america to grow margins and make much rate flow.

Total non-GAAP gross for nan 4th fourth was $146.7 million, an summation of 11% year-over-year and up 1% sequentially. Total non-GAAP gross for nan afloat twelvemonth was $566.3 million, up 13% from nan anterior year. The year-over-year and sequential increases for nan 4th were chiefly driven by an summation successful subscription gross associated pinch nan deployment of caller customers and continued integrated maturation from existing customers.

As I antecedently mentioned, nan effect to gross of nan statement termination was $3.1 million. Our subscription gross for nan twelvemonth was 73% of our full revenue, representing year-over-year maturation of 14%. Based connected nan spot we person seen successful our subscription-based bookings, we expect our subscription gross maturation will accelerate for nan afloat twelvemonth of 2023. For nan 4th quarter, services gross was successful statement pinch our expectations entering nan quarter. As we discussed previously, we're continuing to show master services engagements associated pinch projects that are much discretionary successful nature. Some of which person been and could proceed to beryllium suppressed successful nan existent macroeconomic environment.

Transactional gross represented 11% of full gross for nan quarter, down from nan anterior twelvemonth play of 13% and accordant pinch nan erstwhile quarter. For nan afloat twelvemonth of 2022, transactional gross represented 12% of full revenue, which is down from nan anterior twelvemonth astatine 14%, owed successful portion to a diminution successful gross generated from our measure salary products.

Based connected nan trends we're watching successful our transactional business, our afloat twelvemonth 2023 outlook anticipates nan maturation complaint of our wide transactional gross watercourse to beryllium akin to what we observed successful 2022. We -- we added astir 200,000 users during nan quarter, ending nan twelvemonth pinch complete 21.1 cardinal registered users, an summation of astir 2 cardinal users aliases 10% year-over-year. The sequential summation was mostly driven by integrated personification growth. The year-over-year summation was attributable to integrated personification maturation passim nan twelvemonth and caller customer go-lives mostly concentrated successful nan 2nd half of nan year.

Looking to 2023, we expect an expanding operation of nan number of customers go-lives connected our commercialized banking level arsenic a consequence of nan beardown bookings successful nan 2nd half of 2022. As we've discussed successful nan past, commercialized go-lives transportation a little number of users compared to our unit go-lives, but besides thrust a higher gross per user.

Annualized recurring revenue, aliases ARR, grew to $655.2 million, up 14% year-over-year from $574.2 cardinal astatine nan extremity of 2021. Our ARR maturation for nan twelvemonth was driven mostly by caller and cross-sale subscription-based bookings, partially offset by a diminution successful transactional revenue. In addition, we observed ARR maturation resulting from expanding subscription tally rates associated pinch existing customers. ARR was besides up 3% sequentially from nan 3rd 4th chiefly owed to booking spot observed successful nan 4th quarter. Our ending backlog of astir $1.5 cardinal accrued by $104 cardinal sequentially aliases 7% and equated to a 6% summation year-over-year. The sequential summation was driven by our strongest bookings 4th of nan year, crossed some nett caller and renewals. The year-over-year summation successful backlog was chiefly attributable to nett caller bookings.

As a reminder, nan biggest driver of changes successful backlog are nett caller bookings and renewals. Renewals are taxable to seasonality arsenic good arsenic nan number of opportunities successful Target. As a result, while it's imaginable we could spot a sequential diminution successful backlog successful immoderate fixed 4th owed to little renewal opportunities being available, we judge we will present year-over-year backlog maturation for nan afloat twelvemonth of 2023.

Our trailing 12-month nett gross retention complaint for 2022 was 110% down from 119% successful 2021. Our nett gross retention complaint is calculated by taking nan full gross maturation successful nan almanac twelvemonth compared to nan anterior twelvemonth for immoderate customers that were implemented connected immoderate of our solutions successful that anterior year. The astir important drivers of alteration successful our nett gross retention complaint each twelvemonth person been nan number of caller customers successful nan anterior twelvemonth and nan timing of implementations of those caller customers.

As we antecedently discussed, fixed nan reduced number of go-lives, we had return spot successful 2021, peculiarly successful nan backmost half of nan year, we anticipated that our rates would travel down successful precocious 2022. Our gross churn for 2022 was 6.3%, up from 5.4% successful 2021. The summation successful gross churn was concentrated wrong our nonfinancial institution customers, including nan statement termination during nan quarter, which added astir 50 ground points to our full gross churn. This was partially offset by a simplification successful nan year-over-year churn associated pinch our integer banking customers.

Gross margins were 51.5% for nan 4th fourth and 51.6% for nan afloat year. The statement termination negatively impacted gross margins by astir 150 ground points for nan 4th fourth and 40 ground points for nan afloat year. This effect was partially offset by a reduced operation of lower-margin pass-through gross and nan benefits from continued productivity improvements successful areas of disbursal reduction.

Total operating expenses for nan 4th fourth were $72.7 million, aliases 49.5% of gross compared to $61.5 cardinal aliases 46.5% of gross successful nan 4th fourth of 2021 and $69.8 cardinal aliases 48.2% of gross successful nan 3rd 4th of 2022. The 4th fourth year-over-year summation successful operating expenses arsenic a percent of gross was driven chiefly by nan onboarding of further labor concentrated wrong R&D arsenic good arsenic income and trading during nan first half of nan year.

In addition, we saw an summation successful trading events and recreation compared to nan anterior twelvemonth play arsenic in-person events became much prevalent coming disconnected of COVID restrictions successful nan anterior year. The summation successful operating expenses arsenic a percent of gross from nan erstwhile 4th was partially driven by worker expenses associated pinch nan acquisition of Sensibill, which took spot connected October 3. We ended nan twelvemonth pinch 2,249 employees, up from 2028 astatine nan extremity of 2021, pinch nan immense mostly of hiring taking spot successful nan first half of nan year.

As a consequence of our proactive costs measures, we observed a nett simplification successful headcount for nan last 5 months of nan year. Total adjusted EBITDA was $8.4 cardinal for nan 4th fourth and $36.9 cardinal for nan afloat year. The statement termination negatively impacted adjusted EBITDA by $3.9 cardinal for nan 4th fourth and afloat twelvemonth 2022. The year-over-year and sequential alteration successful adjusted EBITDA saw a meaningful use from nan effective utilization of our world workforce, reduced hiring activity and little contractor expenses arsenic good arsenic reduced accommodation expenses.

We ended nan twelvemonth pinch cash, rate equivalents and investments of $433.4 million, up from $395.7 cardinal astatine nan extremity of nan 3rd quarter. Our CapEx walk arsenic a percent of gross for nan afloat twelvemonth was astir 2%, a simplification from nan 4% observed successful nan anterior twelvemonth arsenic we had little infrastructure and accommodation expenses. We generated rate travel from operations successful nan 4th fourth of $43.9 million. The spot successful operating rate travel was chiefly attributable to bully moving superior guidance and favorable seasonality. We besides generated free rate travel of [$38.4] cardinal during nan quarter.

For nan afloat year, we generated rate travel from operations of $36.6 cardinal and free rate travel for nan afloat twelvemonth of $6.5 million. We delivered this grounds capacity and continued attraction connected higher profitability will construe into continued betterment successful our rate travel conversion for nan afloat twelvemonth of 2023.

Let maine wrap up by sharing our first 4th and afloat twelvemonth guidance. We forecast first 4th non-GAAP gross successful nan scope of $149 cardinal to $152 million, and afloat twelvemonth non-GAAP gross successful nan scope of $632 cardinal to $640 million, representing year-over-year maturation of 12% to 13%. With nan spot successful subscription-based bookings successful 2022, we expect our gross for nan afloat twelvemonth of 2023 will person an accrued operation of this higher-margin gross stream. We forecast first 4th adjusted EBITDA of $10 cardinal to $12.5 cardinal and afloat twelvemonth 2023 adjusted EBITDA of $62 cardinal to $66 million, representing astir 10% of non-GAAP gross for nan year.

Looking ahead, I judge we're good positioned to present profitable maturation towards our extremity of being a norm of 30 institution successful precocious 2024, which we specify arsenic a operation of full non-GAAP gross maturation and adjusted EBITDA margin. In summary, for nan 4th quarter, we delivered coagulated gross results and generated grounds operating and free rate travel for nan afloat year, resulting successful a beardown equilibrium expanse entering 2023. We consciousness assured successful our expertise to show meaningful adjusted EBITDA description successful nan years to come.

With that, I'll move nan telephone backmost complete to Matt for his closing remarks.

Matthew Flake

Thanks, David. In closing, we ended nan twelvemonth pinch our champion bookings 4th successful institution history and entered 2023 pinch a robust pipeline, suggesting that financial institutions proceed to prioritize exertion walk and our differentiated merchandise portfolio is resonating pinch nan market. We are hyper focused connected delivering nan champion customer acquisition and we judge nan investments we've made successful anterior years person positioned america favorably to proceed delivering best-in-class invention for our customers and capitalize connected nan important marketplace opportunity up of us. We scheme to proceed managing nan business pinch an accrued accent connected improving profitability, while maintaining a beardown apical statement maturation floor plan pinch a extremity to go a norm 30 institution successful precocious 2024. And -- convey you.

And pinch that, I'll move it complete to nan usability for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will return our first mobility from Andrew Schmidt, Citi.

Andrew Schmidt

Matt, David, Jonathan. I want to commencement disconnected pinch nan 2023 gross outlook. Maybe thief conscionable span nan outlook versus past quarter. Just funny if there's immoderate differences, peculiarly successful subscription revenues versus transactional and other. Help america conscionable reconcile successful Bridge astatine a definite point, that would beryllium helpful.

David Mehok

Andrew, yes, happy to do that. There's a fewer cardinal items that person changed complete nan people of nan past 3 months since we talked and provided that high-level outlook for 2023. The first of which is -- that statement termination that we discussed, there's complete $4 cardinal effect to 2023. So you person to return that into relationship arsenic you look astatine what nan outlook was antecedently comparative to nan guidance that we provided. We're besides taking into relationship each nan accusation that we've acquired complete nan people of nan past 3 months successful regards to nan discretionary spending situation for services, nan transactional business, which incorporates nan Helix business arsenic well, and we're surely monitoring that space.

And it's -- nan adjacent page has changed complete nan people of nan past 3 months, and we're incorporating each that we cognize coming into that guidance. And nan M&A situation is nan last 1 that I'd reference. We had talked astir nan truth that there's an elongated rhythm for approvals. And what we've seen complete nan people of nan past fewer months is it's really slowed down dramatically successful position of nan number of transactions. In fact, January alone, there's only 6 transactions, 6 M&A transactions for financial institutions, which is nan lowest January since 2009.

So that simplification successful activity is surely thing that is going to effect and has been factored into our guidance for 2023. And nan 1 point that's really important, and I tried to stress this successful nan telephone is that we perfectly consciousness bully astir our subscription gross heading into 2023. We deliberation that maturation complaint is going to accelerate successful 2023. And nan maturation complaint for subscription is astir going to beryllium astir 2x that of services and transactional combined.

Andrew Schmidt

No, that's ace helpful. And I admit nan comments connected benignant of norm 30. Maybe you could conscionable talk a small spot astir -- obviously, there's various ways to get there. Just a small measurement out, but conscionable possibly immoderate preliminary thoughts connected really you get there. And past obviously, a batch has changed complete nan past fewer years. But historically, investors thought of institution benignant of norm 4D and liking rate, different dynamics person changed. But is that still nan correct thought process longer word erstwhile we deliberation astir conscionable nan semipermanent algo for nan company? Or is it adjusted conscionable based connected what we've seen complete nan past 4 years?

Matthew Flake

Yes, absolutely. That is still a semipermanent nonsubjective of ours. And each we were doing was laying retired location 1 measurement towards that guidance successful this norm of 30 towards nan backmost extremity aliases towards nan extremity of 2024. And we surely consciousness for illustration we person nan expertise done nan operation of nan profitability objectives that we've group retired since -- really successful August that are manifesting themselves successful nan P&L astatine successful 2022 and into 2023. We're going to proceed to spot acceleration successful EBITDA, which you tin show from our guidance. And we're optimizing that operation of maturation and EBITDA floor plan going guardant to wherever this norm of 30 that we referenced is conscionable a measurement successful nan guidance of getting to Rule of 40, which we yet judge will beryllium at.

Operator

Next, we'll return a mobility from Joe Vruwink, Baird.

Joe Vruwink

Great. one. I conjecture I'll commencement conscionable looking astatine benignant of a sequencing of EBITDA arsenic you deliberation astir FY '23, I deliberation retired of 1Q, if you're looking astatine a beautiful bully step-up successful incremental margin. Are location definite things that you tin possibly speak to? Or is this really having benignant of knowledge of this optimized costs building exiting nan 2nd half of nan twelvemonth end. And truthful person you started to tally complaint immoderate of those improvements and savings, it drives you to nan higher step-up successful nan 2nd half?

Matthew Flake

Yes. Thanks, Joe. I mean 1 of nan things we really tried to articulate was that we've been very proactive successful position of nan measures we've taken from a costs standpoint. We started this successful nan precocious summer, early fall. We're seeing nan benefits of it now successful position of nan P&L. It's coming from some COGS arsenic good arsenic OpEx, location is simply a mixed constituent of nan business arsenic well. I talked astir subscription gross accelerating into adjacent year.

As you know, subscription gross besides has nan highest separator floor plan of immoderate of nan gross streams that we have. We're doing a batch of activity successful position of optimizing our workforce successful position of making judge that arsenic we adhd resources and arsenic we backfill resources, we're trying to find ways to beryllium much businesslike successful position of really we present and utilize world resources much effectively. We've proven we tin do that complete nan past mates of quarters. We're going to transportation that into 2023. And past we're reducing our accommodation footprint, which is besides giving america immoderate costs favorability arsenic we caput into 2023.

And finally, we surely deliberation that we person nan expertise to proceed to optimize pricing and packaging, which is fundamentally really we're trading and going to marketplace pinch our products and really we're extracting worth retired of those products arsenic we're selling.

Joe Vruwink

Okay. That's great. And past I conjecture this goes backmost to benignant of nan norm of 30 and yet norm of 40, but nan normalized gross presumption wrong that framework. And connected nan telephone today, you said astir a batch of nan inputs that traditionally gotten you to benignant of nan 20% complaint of growth. You're talking astir cross-selling crossed nan suite, talking astir integrated personification growth. Obviously, churn is simply a consideration. But I guess, really do you deliberation astir immoderate of those inputs? And wherever would you put nan conception coming if you benignant of revisit each of those variables?

Matthew Flake

Yes. Thanks, Joe. And nan measurement that I would look astatine it is, look, nan world has changed a batch successful nan past 18 months for sure. And 1 of nan things that we're trying to return into information is are those changes. First and foremost, immoderate of nan things that person happened successful position of discretionary spending and transactional revenue. But astatine nan aforesaid time, -- nan move to integer translator connected behalf of our financial institutions is remaining strong. That's wherever we're focusing our efforts and resources. We're making judge that we're dedicating those resources to nan areas that are generating nan highest return. So arsenic you've seen immoderate changes comparative to what we communicated 18 months agone successful position of nan maturation profile, we've besides made immoderate changes proactively successful position of our costs profile. And arsenic you referenced, that we're marching towards towards nan extremity of 2024 is optimizing nan operation of those 2 things.

Operator

We'll spell to Terry Tillman, Truist Securities.

Terry Tillman

Yes. Can you perceive maine okay?

Matthew Flake

Yes, we've sewage you, Terry.

Terry Tillman

Matt, David and Jonathan. I conjecture nan first question, and sorry to put you connected nan spot map, but I'm going to put you connected nan spot. During this net season, which continues a pace. I haven't heard companies talking astir a grounds trading quarter. So I mean it's beautiful notable. And truthful what I'm funny astir whether it's benignant of apical of nan chimney aliases conscionable benignant of request gen successful general? And I cognize that you've sewage benignant of this unsocial move astir deposits and loans and conscionable a broadening platform. But really do you consciousness astir bookings activity qualitatively arsenic we're heading into '23 here? And conscionable tin you support up nan vibrancy connected nan caller bookings side? And past I person a follow-up for David.

Matthew Flake

Yes. Thanks, Terry. If you look astatine nan past 2 quarters, Q3 and Q4, you began to spot nan momentum connected nan integer banking side. And I deliberation what that is, is simply a mates of things. It's coming retired of nan pandemic. The unit is connected nan bequest systems that didn't person nan characteristic functionality that were required, really raised attraction to nan property of nan exertion to nan activity of nan financial institutions we're dealing pinch -- and they've seen much executive engagement successful these opportunities than I've ever seen. And truthful it culminates successful a grounds Q4 pinch conscionable that breadstuff and food of this business, that Tier 2, Tier 3, those deals, we signed much deals they signed successful nan pandemic successful a agelong clip successful nan quarter, a batch of bully measurement had a bully Tier 1 successful there. So that activity is strong. The unit astir deposits has put a attraction connected this arsenic well. Every woody had commercialized banking successful it. And truthful commercialized banking for america drives a higher ARPU, drives higher [RSP].

It's a amended semipermanent customer because of nan integration and nan extent you person pinch them, and it's very difficult to move disconnected nan system. And truthful whether arsenic a slope aliases a in installments union, we really are pushing those products. And truthful nan request situation connected nan deposit broadside of nan location is arsenic beardown arsenic I've seen it successful a agelong time. For those of you that cognize nan business, cognize that it takes 9 to 12 months to travel to revenue. So you're going to look astatine immoderate of this successful nan backmost half of precocious third, 4th fourth of '23, and past astir of it, you'll get astir of it successful '24. So very encouraged by that activity.

Obviously, connected nan lending broadside of nan house, it slowed somewhat, but you still person customers that request exertion to originate and work loans. And past -- truthful there's going to beryllium unit connected nan lending broadside of nan business, I think, for nan first half of nan year. But connected nan precision lender, nan pricing and narration tool, we had akin occurrence pinch that astatine nan extremity of nan year, but that's opening -- what we're going to spot is nan transportation of that merchandise into nan existing customers and past nan description will statesman to happen, for illustration we saw a mates of description deals successful this quarter.

So consciousness really bully astir nan request situation connected nan integer banking side. And I consciousness for illustration nan products we person connected nan lending broadside are unsocial capable to wherever we're capable to thrust we're capable to benignant of upwind this quickly rising liking complaint situation to wherever we tin differentiate ourselves and nan pricing and narration instrumentality is very valuable successful that. So we're encouraged to bargain nan pipeline, and excited astir nan measurement things look moving forward. So I admit nan question. And you had 1 for David, I think.

Terry Tillman

I did. Yes. So David, it sounds for illustration -- I mean, yes, it's a very fluid benignant of macro situation. So it sounds for illustration immoderate moving parts arsenic it relates to discretionary services and past Helix transactional revenue, and past nan M&A environment. Could you -- truthful a 2-part question. Could you stack rank 1 of those 3 items has changed nan astir since nan past update? And past connected nan subscription revenue, to get to your norm of 40 arsenic you exit '24 -- is it benignant of astatine that aforesaid complaint that it accelerates successful '23? Or does it accelerate further?

David Mehok

Yes. Sure, Terry. And truthful to benignant of do nan stack ranking, I would opportunity -- each of them person changed to an grade complete nan people of nan past 4 months. The biggest impact, rather frankly, to nan guideline was that statement termination. As I said, that was a greater than $4 cardinal effect to FY '23. Sort of looking astatine what's changed there, I would opportunity that nan Helix situation and nan fintech situation has surely changed -- and I would astir apt stack rank that astatine nan top. The different transactional revenue, which is successful measure pay, I would say, benignant of next. M&A is going to beryllium comparatively mini successful position of nan effect that it has connected our gross successful year-end 2023. So I would opportunity that's next. And past finally, we really did rightsize for nan astir part, that discretionary spending impacts heading into Q4. And I deliberation I mentioned that connected nan call. What came successful Q4 was comparatively aligned pinch what we expected, but we're conscionable making judge that we're factoring that into nan guideline afloat based upon what we cognize today. Is location thing else, Terry?

Terry Tillman

Yes. I mean, unfortunately, I asked a 2-parter connected nan 2nd question, truthful that's unspeakable for me. But yes, truthful David, it was conscionable related to your aspirational extremity of nan norm of 30 benignant of progressing towards that by nan extremity of '24. Would you opportunity that subscription gross accelerates further from wherever it ends up shaking retired successful '23 aliases it's astir nan aforesaid level? Because I'm asking that because I'm decidedly getting questions astir nan booking spot and possibly if there's for illustration a multiyear benignant of acceleration aliases conscionable immoderate it accelerates successful '23, it stays astatine that level successful '24?

David Mehok

Yes. Thanks, Terry. There's a batch of variables successful spot for america to get to that norm of 30 successful precocious '24. So we're not going to get to nan constituent of parsing retired precisely wherever it's going to travel from. Certainly, booking spot -- successful our subscription-based business, it's going to consequence successful accelerated subscription gross astatine immoderate constituent successful nan future. But we're not going to commencement to look astatine those individual variables and commencement to opportunity precisely really overmuch it's going to travel from which for 2024 yet. We surely want to attraction connected delivering and executing connected '23 comparative to nan guidance and immoderate of nan commentary that we provided connected that.

Operator

Next up from Raymond James is Alex Sklar.

Alex Sklar

Matt, I wanted to travel up connected your reply to Terry's first question. Every woody you said having commercialized banking portion -- what tin you show america now astir your pipeline creation successful position of commercialized banking opportunities wherever it seems for illustration you person precocious triumph rates versus benignant of unit banking and your different solutions?

Matthew Flake

Alex, nan tube from an RFP perspective, it's up quarter-over-quarter, year-over-year. Total opportunity is created. Those are up quarter-over-quarter, year-over-year, large year-over-year. demos are up, I think, 21% year-over-year. So nan activity connected nan integer banking broadside is evidently increasing. And I don't person nan stat connected it, but there's a batch of commercialized activity. I would deliberation you'd spot those 70%, 80% of those are -- person commercialized banking related to them. I conscionable want to make judge you understand nan logic for that is because that's wherever a batch of those deposits are. And what's happening is that nan retention of those deposits for those commercialized customers is critical. And our exertion is 1 of nan devices I virtually had banks scope retired to them and say, we're telling them to clasp connected until we do nan conversion, because we're going to upgrade nan exertion and it's going to beryllium a amended experience. So that's really what's driving that arsenic good arsenic we person a batch of in installments unions that are signing up for commercialized banking because there's a batch of opportunity successful nan in installments national abstraction to return advantage of they person a batch of mini and midsized businesses that are hiding connected nan unit product. And truthful our expertise to return our unit merchandise and move connected commercialized functionality connected request is highly differentiated. And truthful that's 1 of nan things that's driving a batch of that activity arsenic well.

Alex Sklar

And then, David, you gave america successful nan past, I deliberation it was 70% gross margins connected a subscription renewal -- and we heard astir nan amended operation for 2023, that's going to benignant of use gross margin. But what tin you show america astir benignant of statement of show to gross separator betterment complete nan adjacent twelvemonth aliases 2 successful position of that stat aliases immoderate of nan different buckets that you have?

Matthew Flake

Yes. We surely do spot that separator description connected conscionable to springiness a small discourse connected that. I mean 1 of nan bigger drivers down that is you person nan operation of subscription gross mixed pinch nan recurring gross that we person associated pinch nan implementation services. So erstwhile you spell done a renewal process, those implementation services rotation off, those are little margins. So arsenic a result, you get a separator uplift from that connected apical of nan incremental users and incremental solutions that you've been adding, which are typically higher margin. So we do expect that to proceed arsenic we renew customers, we get higher margins. past conscionable broadly speaking, successful position of nan gross separator floor plan going forward, we expect nan EBITDA description that we provided successful guidance to travel some from OpEx scaling, truthful OpEx coming successful little arsenic a percent of gross mixed pinch gross separator description . So you're going to spot some of those statement items present towards that EBITDA accretion.

Operator

The adjacent mobility is Robert Napoli, William Blair.

Robert Napoli

Question, I guess, connected -- first, connected nan statement termination and conscionable possibly your wide lending business wrong your lending business. First of all, is location thing other that we should beryllium alert of successful nan portfolio that could beryllium for illustration that? How do you get a reversal really did this -- what happened, I guess. And past conscionable really that relates to -- I cognize you made nan acquisition was this successful Cloud Lending. I cognize it's not portion of Precision Lender, but conscionable immoderate update connected your wide lending business arsenic well.

Matthew Flake

Yes, Bob. So this is simply a woody that was a bequest statement we had before. And it was looking astatine wherever we are now arsenic we attraction connected becoming a profitable maturation company, it conscionable didn't fresh into nan guidance we were going. Part of nan ways mutually, for illustration I said, it was replacement finance, world company. It wasn't really successful our wheelhouse looking backmost connected it now. And truthful we've moved guardant -- moved connected from it, some of america pinch -- connected bully terms. And -- truthful it's a business determination we had to make nan some of america had to make and we moved connected from it. As acold arsenic nan lending business goes, for illustration I said earlier, you're going to spot unit connected erstwhile rates emergence this fast. People are not asking for loans. The workouts that are happening and that type of thing. You still person banks still because you still request to automate their origination process. They're going to request to automate their servicing process, but it is thing that's going to slow down.

As acold arsenic nan narration pricing to a precision lender, arsenic I said earlier, it's successful demand, you're seeing it turn wrong existing customers, and getting people's attraction connected nan lending broadside is benignant of what nan distraction is correct now, but I consciousness bully astir nan measurement that squad is engaged successful nan opportunities. that we have. And I deliberation you'll spot successful nan backmost half of nan year, a batch of momentum, but integer banking has carried nan 4th obviously, and has a batch of momentum going into '23, that really correct wherever nan tube is and nan woody activity correct now.

Robert Napoli

And past I deliberation David. Yes, a mobility for, I guess, it would astir apt beryllium for Jonathan maybe. But connected Helix, your -- you were targeting $100 cardinal successful revenue, I believe, by 2026. I deliberation that was nan number you had fixed successful nan past. And I cognize that nan fintechs successful this situation whitethorn beryllium slower growth. But conscionable immoderate update connected -- is that still a reasonable target? What is simply a reasonable target for Helix pass? And what are you seeing arsenic acold arsenic opportunities and nan embedded finance aliases BaaS area?

Matthew Flake

Yes. We haven't -- obviously, a batch has changed arsenic David said, complete nan past 18 months, and that's surely existent wrong nan Helix business. We haven't fixed a revised semipermanent position of it. But we surely still consciousness very bully astir nan opportunity group successful beforehand of us. What I'd opportunity is nan creation of nan pipeline has changed. Right now, erstwhile you look astatine fintechs, arsenic we've talked about, we're still focused connected nan bigger opportunities. But now nan creation of nan pipeline is really filled pinch conversion opportunities that are looking for a level that tin standard that are looking for a amended economical result from their vendors. And truthful we're conscionable seeing a very different position of really nan larger fintechs are behaving. We're besides seeing a batch of maturation wrong our existing customers, arsenic I talked astir connected nan script, Really, really important.

We proceed to person a twelvemonth that was characterized by meaningful multiyear renewals of these ample Helix clients, and that drives a batch of maturation successful this business. And truthful you wed those 2 things pinch our marque strategy and what we're seeing connected nan marque side. And I'd opportunity what's changed location complete nan people of '22, particularly arsenic we sewage into Q4, is we're overmuch much focused now successful nan verticals wherever we deliberation we tin win.

If you rewind nan clock, 6 to 9 months, I'd opportunity we were beautiful fierce successful going aft a bunch of ample opportunities crossed verticals. And we benignant of learned wherever we're beardown and wherever we tin triumph and wherever our exemplary works. And certainly, successful this environment, I deliberation that's prudent for america to beryllium very focused, and we're still bullish connected nan opportunity. It's just, arsenic I mentioned, a lot's changed, and we're navigating done that environment, but still excited astir what this business tin do.

Operator

And adjacent up is Charles Nabhan, Stephens.

Charles Nabhan

Two-part question. First, if we deliberation astir nan expected acceleration successful subscription growth, could you springiness america a consciousness of really overmuch of it is coming from cross-sell versus personification maturation versus caller logos? And secondly, arsenic you travel up connected these large renewals, could you remark connected nan pricing situation and immoderate impact, affirmative aliases antagonistic nan pricing of those deals mightiness person and your expertise to cross-sell into those caller -- adhd caller products into those caller contracts?

Matthew Flake

Chuck, sure. So connected nan subscription breakdown, it's really coming from some costs and nett new, and it's comparatively evenly split. We're seeing a batch of bully momentum successful both. And really it varies by quarter, 2nd half of nan year, we really saw immoderate bully momentum pinch subscription and that's going to transportation guardant into adjacent year. So there's really an adjacent driver coming from each 1 of those areas. On nan pricing standpoint, you're asking astir nan pricing situation that we're seeing?

Charles Nabhan

Yes.

David Mehok

Yes. Yes. So a fewer things that I conscionable -- I mentioned there, and I don't know, Matt whitethorn person a mates of points. One is that -- we're seeing immoderate very precocious triumph rates correct now. The 2nd half of nan year, our triumph complaint was astatine 50%. So we consciousness really bully astir really we're positioned, peculiarly erstwhile you look astatine nan creation of nan deals wherever we're playing and wherever we're winning. As these deals proceed to summation successful breadth, we proceed to spot a higher triumph rate. So nan screening process that we're going done successful position of nan deals that we participate is surely an important adaptable successful each that -- successful fact, erstwhile you look astatine nan bookings that we've won connected nett caller deals for FY '22, nan mean woody size was up 34% year-over-year from 2021. So that's -- there's a fewer contributions there. One is nan publication of much products and breadth and 2 is nan publication of commercialized being a bigger part. So we're decidedly emotion for illustration we're really good positioned to efficaciously surface nan deals triumph our share. And nan triumph rates that we saw successful nan 2nd half of 50% surely grounds that.

Charles Nabhan

And conscionable arsenic a follow-up to. Sorry. I wanted to drill successful -- arsenic my follow-up, I wanted to drill into nan gross operation wrong Helix and specifically get a consciousness for really overmuch of that Helix gross is transaction driven versus subscription aliases user-related?

Matthew Flake

Yes. So nan measurement I would deliberation of it is astir 30% of nan gross would beryllium what I would telephone analogous to subscription revenue, wherever it's either nan level fee, nan existent subscription interest aliases what we telephone excess personification fees. Then you person a bucket that I would broadly telephone transactional revenue, and that includes everything from interchange revenue, deposit float to nan grade there's immoderate gross stock connected a deposit programme and past pass-through fees. And pass-through we've talked astir -- David talked astir a batch successful position of really that impacts nan Helix business from a separator perspective, but that includes things for illustration fraud monitoring and different power solutions to thief america manage, navigate fraud disputes and nan like. And truthful that makes up nan equilibrium of it. So it's a overmuch much transactional business inherently than nan integer banking aliases integer lending business.

Operator

William McNamara from BTIG is next.

William McNamara

In position of reasoning of separator improvements and things of that nature, you talked a small spot astir nan headcount expanding somewhat compared to past year. But conscionable benignant of wanted to cognize really you're reasoning astir headcount going into 2023?

Matthew Flake

Sure. And 1 information constituent that I deliberation is important to statement is erstwhile you look astatine nan proactive actions that we said we took starting precocious summer. That included each nan areas that I referenced, whether it's immoderate areas of contractor spend, third-party spend, accommodation footprint, and headcount. Our headcount was really down from a nett standpoint from nan extremity of August done nan extremity of December. Now arsenic we look guardant into FY '23, there's surely immoderate areas wherever we consciousness it's really important for america to adhd immoderate headcount, and that's going to beryllium successful areas that typically touch nan customer arsenic good arsenic nan products. So nan customer and nan product, nan areas wherever we're going to invest.

We're besides going to find much businesslike ways of doing that though. And that was my constituent connected Global Resources. We tin adhd heads nett connected an wide ground and still person our wide costs floor plan not move excessively much. So those are nan things that we're looking astatine is really do we trim nan costs per head, one; and past two, make judge we're really businesslike pinch nan heads that we have. And past three, we will beryllium adding heads successful circumstantial areas that touch nan customer and nan product.

William McNamara

Okay. Great. And past successful position of reasoning astir nan churn complaint that you disclosed, I conjecture conscionable is location immoderate much colour you tin adhd to that successful position of deals possibly you guys are stepping distant from if it conscionable doesn’t fresh your criteria – aliases things of that nature?

Matthew Flake

Yes. I mentioned that successful nan pricing question, which is we’re doing really bully occupation of screening opportunities now and making judge that nan deals that we’re going aft are those that are going to output nan highest return. And that’s going to beryllium based upon nan scope of nan opportunity. Is nan customer really looking to toggle shape digitally. Do we person opportunities to proceed to grow pinch them arsenic they grow. And we’ve done a really bully occupation complete nan people of nan past twelvemonth arsenic is evident by that 34% summation that I referenced. So we consciousness really bully astir really we’re screening deals now for existing customers. We’re going to proceed to turn pinch them arsenic well. And we’re going to find if there’s opportunities for america to proceed to grow pinch an existing customer that usage that done their aliases inorganic opportunities aliases by expanding nan products that they person pinch us, we’re surely going to capitalize connected that.

Operator

And ladies and gentlemen, that does reason our question-and-answer convention arsenic good arsenic nan Q2 Holdings 4th fourth and afloat twelvemonth 2022 financial results call. At this time, you whitethorn disconnect. Good bye.

Editor: Naga



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