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Q2 Holdings (NYSE:QTWO)
Q4 2019 Earnings Call
Feb 20, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings fourth-quarter and full-year 2019 financial results conference call. [Operator instructions] Thank you.

I will now turn the call over to Steve Calk, director of investor relations. Sir, please begin.

Steve Calk -- Director of Investor Relations

Thank you, operator. Good morning, everyone, and thank you for joining us for our fourth-quarter and full-year 2019 conference call. With me on the call today is Matt Flake, our CEO; and Jennifer Harris, our CFO. This call contains forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of Q2 Holdings.

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, including our most recent annual report on Form 10-K and subsequent filings and the press release distributed yesterday afternoon 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 date 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 the call 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 may be found on the Investor Relations section of our website and in our Form 8-K filed with the SEC yesterday afternoon. Now let me turn the call over to Matt. Matt?

Matt Flake -- Chief Executive Officer

Thanks, Steve. Today, I'll share some highlights from the fourth-quarter and full-year 2019. I'll then turn the call over to Jennifer for a more detailed look at our 2019 financial results, as well as guidance for the first quarter and full-year 2020. In the fourth quarter, we generated non-GAAP revenue of $88.7 million, up 32% year over year and 11% sequentially.

Non-GAAP revenue for the full year was $317.3 million, up 32% year over year. We added more than 500,000 users in the fourth quarter, ending the year with 14.6 million users on our platform, a year-over-year increase of 14%. 2019 was a transformational year for Q2. We continued to meaningfully expand the functionality of our digital banking platform, as well as our customer footprint in the digital banking space.

Our commercial capabilities, bolstered by our acquisitions of Cloud Lending and PrecisionLender have equipped us to partner with some of the largest and most progressive financial institutions in the market, and we added several of these customers to our roster in 2019. On the Q2 Open side, we signed and launched our banking-as-a-service products across several of the industry's most noteworthy fintech companies. In late 2019, we surpassed 5 million users on CorePro, the Q2 Open platform. This is an operational milestone that I'd like to congratulate our team for reaching.

The potential for rapid user growth continues to be a promising component of the Q2 Open story and we're excited to help some of the most progressive fintechs in the country to partner with community financial institutions. 2019 also marked our evolution into the digital lending space, and I'm pleased with Cloud Lending's contributions to the business in their first full year as a part of Q2. The sales team is performing at a high level, and our existing customer base continues to ask for help in digitally transforming their lending business. And of course, in the fourth quarter, we extended our commercial banking capabilities and expanded our addressable market through our acquisition of PrecisionLender.

And finally, in 2019, was our first full year as a global company, we had big wins in our international geographies. And I speak for the team when I say we've been inspired by the talent and new perspectives brought by our international customers and team members alike. As we head into 2020, I believe we are well-positioned to continue on our trajectory as a leader in digital transformation for global financial services. With the solutions portfolio that enables us to partner with some of the industry's largest and most progressive financial services providers, whether they are a bank, credit union, alternative finance company or fintech.

Now I'd like to dive into some updates from the fourth quarter, specifically. And I'll start with a few comments about our sales execution. In 2019, we had strong sales performance that was bolstered by the cross-pollination effect we've started to see from our expanded solutions portfolio. We added to that sales success in the fourth quarter, building on several key themes we saw throughout 2019 and ending the year with a committed backlog of over $1 billion.

First, our digital banking platform team signed two Tier 1 financial institutions, making it 10 straight quarters with at least one new Tier 1 platform signing. We believe our consistency in the Tier 1 segment is an encouraging sign that our products are resonating in this space. And I've been pleased with our sales team's ability to effectively expand our presence within the Tier 1 market. As an example, one of the Tier 1s we signed in the fourth quarter is a top 50 U.S.

bank that selected our digital banking platform for small business and corporate banking. This is a big win for Q2. The bank will be one of our largest digital banking clients. I believe that the combination of user experience and feature breadth of our corporate banking suite put us in position to compete for and ultimately win this opportunity.

As I mentioned at the onset of the call, our expansion into the corporate arena has provided us a valuable inroad into new digital banking opportunities. Many of them with larger financial institutions where commercial banking is a critical component of their strategies. And when you combine our corporate banking suite with our expanded commercial lending capabilities, we have a compelling solution to help clients win more commercial loans more efficiently and then onboard those relationships onto our corporate banking platform. And in addition to helping land this Tier 1 client, our corporate banking suite played a major role in our overall success in the fourth quarter, showing up in a majority of our net new deals and driving significant cross sales success as well.

On the subject of cross sales, we had a record quarter of renewals from a bookings perspective. At the end of the year, in which we meaningfully evolved our business, I read the strong renewal activity from the quarter as an indicator that our customers understand and appreciate our strategic direction, which is consistent with the feedback I hear when speaking directly with clients. And of course, renewals don't happen unless we are keeping clients happy, which, as I've always said, consist of keeping their system up and available, picking up the phone when they call and continuing to deliver innovation on a consistent basis. On the lending side of the house, we wrapped up our first full year with Cloud Lending with a record bookings quarter, comprised of strong net new activity, and the best cross-sell quarter in Cloud Lending's history.

Just as with our digital banking platform, I believe cross sales and renewals signify that the Cloud Lending product, customer support and operations teams are fulfilling their promise to our clients. On the net new front, I'm encouraged by the traction this team is gaining in North America, and in the fourth quarter, Cloud signed the single largest deal in its history with a major alternative lender in North America. And as we wrap up our first full year with Cloud Lending as part of the Q2 family, I want to thank both the teams and the clients that have made the first year a success. There's a long road ahead of us but the talent, knowledge, and passion of the Cloud team have exceeded our expectation.

Following our close of the PrecisionLender acquisition in November, the team has signed multiple deals, with two I'd like to highlight. The first was with a $15 billion bank in the Southeast that is an existing Q2 platform customer. While this opportunity was in flight prior to the acquisition, we believe that deepening our commercial banking solutions and combining Q2's banking platform with PrecisionLender was a key differentiator, and I'm optimistic this will be the first of many PrecisionLender deals with existing Q2 customers. The second deal I'd like to highlight was the signing of a top-five Canadian bank.

When we made the acquisition, I spoke about precision lenders opportunities with some of the world's largest banks. And for this deal come to fruition following the acquisition leads me to believe that the market is viewing the combination of Q2 and PrecisionLender as a positive. Given how the new PrecisionLender products out of the Q2 story, I want to take a moment to illustrate the power of the PrecisionLender suite by way of real-world example. Today, virtually every commercial lender is forced to compete on rate, frequently leading them to decide between losing money on a lending deal or losing the deal altogether.

Instead of working from a static spreadsheet, PrecisionLender gives the commercial banker, a set of intelligent tools that leverage close to $2 trillion worth of loan data to deliver in-the-moment sales coaching, structuring and pricing recommendations. As the banker puts these recommendations into play, PrecisionLender can demonstrate the impact on the profitability of the commercial relationship, using data to provide bankers real-time insights on their deals gives them the visibility they need to make better loans, an outcome that when applied across an institution's portfolio can have a meaningful impact on revenue, profitability and client relationships. While it's early innings with PrecisionLender, and we still have work to do on integrating our products, I'm pleased with the reception we have received from our clients, and we are optimistic about what 2020 has in store. Now before I hand the call over to Jennifer, I want to provide just a little color on the operational scale that we've achieved.

The end of the year is always a good time to reflect, not just on how we did in the previous year but also on what we've achieved since our founding. For instance, our customer base has evolved considerably. We ended 2019 with 414 digital banking customers in production, and 46 of those have more than $5 billion in assets, compared to only a handful at the time of our IPO. Across our entire portfolio, we have one-third of the top 100 U.S.

banks on our customer roster. None of this happens without the investment in hosting, in security and the innovation in these institutions' increasingly demand from their technology vendors. And from a registered user perspective, we ended the year with 14.6 million end users on our digital banking platform. Those 14.6 million users moved over $1 trillion through the Q2 platform, compared to $200 billion at the time of our IPO.

While the raw growth in digital banking traffic we see is partially due to the growth of our user base, users are accessing their institution's digital banking more and more frequently, underscoring the increasing importance of this channel to our clients. In 2019, users logged in an average of 246 times a year compared to roughly 70 in 2014. I believe the data that we see through our technologies is among our most valuable assets as a company. Compared to point solutions shallow data, our platform's reliable, highly resilient integrations generate deep data on how account holders spend, save and behave.

This deep data, which produces a robust view of each end user, means we can create meaningful insights beyond just serving up account balances. These insights help our customers run their businesses, like we do today through Q2 SMART, our risk and fraud products, and PrecisionLender. And as an engagement on our platform and the data it creates continue to grow, it becomes an even more critical pillar of our strategy and a powerful differentiator for our business. Finally, I view all of the data as evidence that digital transformation and financial services is only becoming more important.

Financial institutions are increasingly being asked to become technology companies by their customers. And to do so, I believe they must evaluate how technology can transform the way they operate and deliver their services across every line of business. From deposits to loans, from front office to back office. It's with this concept in mind that I say I believe our success in 2019 helped solidify our position as a leader in powering digital transformation for global financial service providers.

And I'm optimistic that we will continue on that journey into 2020. Thank you. And with that, I will pass the call over to Jennifer to discuss our fourth quarter and full-year results and guidance for the first quarter and full-year 2020.

Jennifer Harris -- Chief Financial Officer

Thanks, Matt. I'll begin by reviewing our results for the fourth quarter and full-year of 2019 before finishing with guidance for the first quarter and full-year of 2020. Please note that all numbers referenced in my remarks are on a non-GAAP basis unless otherwise stated. As a reminder, we told you last quarter that given the sizable deferred revenue balance acquired from PrecisionLender and the substantial deferred revenue reduction recorded as part of our purchase accounting, we plan to disclose and discuss revenue on a non-GAAP basis, excluding the impact to deferred revenue from purchase accounting go forward as we believe it more accurately reflects the true revenue run rate of the business.

All reconciliations of non-GAAP numbers to the most comparable GAAP numbers are available in the tables attached to our earnings release. Total non-GAAP revenue for the fourth quarter was $88.7 million, an increase of 32% year over year and up 11% from the previous quarter. Revenue for the full year of 2019 was $317.3 million, up 32% year over year. Approximately $4 million of the sequential and year-over-year increase for the fourth quarter was generated from the inclusion of PrecisionLender revenue in our results of operations for the months of November and December.

The remaining sequential and year-over-year increase was driven by the increase in subscription and services revenue related to the Q2 platform business as a result of new customer go-lives in the quarter, organic user growth on our digital banking platform and an expanding contribution from our banking-as-a-service and lending businesses during 2019. Transaction revenue represented 14% of total revenue for the quarter, down from 15% in the previous quarter and 17% in the prior-year period. Transaction-based revenue represented 15% of total revenue for the full year of 2019, compared to 16% for the full year of 2018. The declined transaction revenue as a percentage of total revenue is attributable to the increased subscription revenue generated from PrecisionLender, as well as continued slowing growth in bill pay revenue.

As Matt mentioned, Q4 2019 was our largest renewal quarter to date, with over 40% of our bookings for the quarter being generated by long-term renewals and contract extensions. Renewals added almost two times the dollar value of bookings to our backlog in Q4 of 2019 than the dollar value of renewal bookings added in Q4 2018, our strongest renewal quarter previously. This renewal achievement, combined with our strong sales performance and continued Tier 1 wins, contributed to an admitted backlog for the existing business, excluding PrecisionLender of over $1.1 billion as of December 31, 2019, up approximately $138 million from the end of last quarter. In addition, the acquisition of PrecisionLender in the fourth quarter added approximately $27 million to the total year-end backlog, excluding the impact of any reduction in deferred revenue as a result of purchase accounting.

Our revenue churn for 2019 was consistent with prior years at 5.1%. Approximately 35% of the churn was a result of M&A activity within the industry, and churn from acquired businesses added approximately 0.5% to the total. I continue to anticipate churn to remain at approximately 5% for 2020. Our Q2 platform install customer count at the end of the year was 414, up from 401 at the end of 2018.

The growth in customer count was concentrated in the back half of the year with a spike in new customer go-lives, combined with reduced churn from M&A activity in our customer base. Our trailing 12-month revenue retention rate for 2019 was 120%, up from 114% in 2018. The revenue retention rate for 2019 on just the Q2 platform business was approximately 116%. And solutions added by the acquisitions we closed in the fourth quarter of 2018 served to increase that revenue retention rate to 120% for the year.

Given the broader portfolio of products, including the PrecisionLender solutions added in Q4 of 2019, I would expect our revenue retention rate in 2020 to be comparable with that of 2019. Gross margin was 56.8%, up from 52% in the fourth quarter of 2018 and 53.6% in the previous quarter. For the full-year 2019, gross margin was 54%, up from 53.3% for the full-year 2018. The sequential and year-over-year increase is attributable to the continued growth in subscription revenue, combined with a decrease in lower-margin transaction revenue.

In addition, the expanded revenue contribution from our cloud-based banking-as-a-service and lending businesses, including two months of high-margin revenue contribution from PrecisionLender also improves both our sequential and year-over-year margins. Total operating expenses were $43 million, up 24% from the year-ago period and up 7% from the previous quarter. Both the year-over-year and sequential increase in operating expenses were driven primarily by headcount additions and the related increase in employee benefit costs. As we ended the year with 1,574 employees, up from 1,190 at the end of 2018, with approximately 150 of those employees being added as a result of the PrecisionLender acquisition.

In addition, the expansion of our businesses globally with the acquisitions of Cloud Lending in Q4 of 2018 and PrecisionLender in Q4 of 2019 brought with them increased facilities costs to support our global footprint, as well as increased regulatory and compliance costs to comply with new global initiatives, such as import/export controls, international immigration costs and GDPR compliance. Adjusted EBITDA was $10.6 million, up from $3.1 million in the fourth quarter of 2018 and $5.6 million in the previous quarter. Adjusted EBITDA for the full year was $19.6 million, up slightly from $19 million in 2018, even with the impact of the PrecisionLender acquisition. Without the impact of the PrecisionLender acquisition for November and December, adjusted EBITDA on the remainder of the business would have been $12.2 million for the fourth quarter and $21.2 million in the full-year 2019.

We ended the quarter with cash, cash equivalents, and investments of $132.4 million, down from $636.9 million at the end of the third quarter. Cash flow from operations for the fourth quarter was $1.9 million, and we generated free cash flow of approximately $350,000. Operating and free cash flow were offset by approximately $510 million paid for the acquisition of PrecisionLender. Let me wrap up by sharing our first quarter and full-year 2020 guidance.

As discussed previously, we will be providing guidance for non-GAAP revenue and adjusted EBITDA. We forecast first-quarter non-GAAP revenue in the range of $92 million to $94 million. And full-year revenue in the range of $412 million to $416 million, representing year-over-year growth of 30% to 31% for 2020. We forecast first-quarter adjusted EBITDA of negative $3 million to negative $2 million and full-year 2020 adjusted EBITDA of $16 million to $19 million.

Similar to 2019, we expect to see increased operating leverage and a return to positive adjusted EBITDA in the second half of the year, with a steep ramp in Q4 of 2020 given the operating losses we are absorbing from the PrecisionLender acquisition and the timing of any expected synergies. In summary, 2019 was another strong year of solid execution for Q2 and as we delivered strong bookings and renewals, including several examples of cross-pollination of our various solutions within our existing customer bases. We also expanded our commercial lending product portfolio with the addition of precision lenders, data-driven sales enablement, pricing and portfolio management tools for global financial institutions. Given the acquisition of PrecisionLender, combined with the Tier 1 sales success across the broader portfolio, we intend to continue investing in people and processes to integrate the business and ensure successful customer outcomes.

Based on these investments, we expect margins to be impacted in the first half of the year, and we expect to return to positive adjusted EBITDA in the back half of the year in a pattern very similar to what we saw in 2019. Now let me turn the call back over to Matt for his closing remarks.

Matt Flake -- Chief Executive Officer

Thanks, Jennifer. In closing, I'm extremely proud of our performance in 2019. This was a year when we expanded our employee and customer bases, significantly enhanced the value we bring to our customers, and positioned ourselves for the future of digital transformation. I want to thank our employees around the world for a job well done in 2019.

I personally appreciate your hard work and commitment to our customers, our vision, and each other, and I know our customers appreciate each of you for your innovation and dedication to excellence. Looking to 2020, I believe we're in a great position to capitalize on the digital transformation movement in financial services. Banks spend on IT continues to grow and newer entrants to the space like fintechs and all the FIs are gaining traction and looking to expand their capabilities. With our current solutions portfolio, we believe our market opportunity is as large as ever.

And while we have work to do to integrate our products, I believe our value proposition to aid our clients with digital transformation across their businesses, wherever they are in that transformation, is unique in the market. Thanks. And with that, I'll turn the call over to the operator for questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from Sterling Auty with JP Morgan.

Sterling Auty -- J.P. Morgan -- Analyst

Yes, thanks. Hi, guys. So one question, one follow-up. Maybe we'll just start with the housekeeping question...

Jennifer Harris -- Chief Financial Officer

Sorry. Sterling, could you repeat that?

Sterling Auty -- J.P. Morgan -- Analyst

Yes. I'm going to ask a housekeeping question. In the press release, the table in the back-half guidance, the revenue numbers, can you help us reconcile what happened there versus the guidance that you gave in the beginning of the press release?

Jennifer Harris -- Chief Financial Officer

Yes. Sterling, we realized shortly after the press release hit the wire that the original reconciliation of GAAP revenue to non-GAAP revenue in the press release tables was incorrect. The guidance in the actual press release was correct, and we filed a corrected press release last night and an amended 8-K this morning. So I apologize for that clerical error.

Sterling Auty -- J.P. Morgan -- Analyst

No problem. Thank you for that. And then Matt and Jennifer, when I think back to the IPO, the talk was your addressable market was really all the banks and credit unions below the top 75. Those top 75 seem like they're almost untouchable given the investment in their own solutions.

So when I see winning business with a top 50 bank in the U.S., it really kind of marks a distinct change. And I'm curious, what do you think has changed in the mindset of those top 50 or 75? And with the solutions portfolio that you have, what do you think the opportunity within that highest level of institutions are for you going forward?

Matt Flake -- Chief Executive Officer

Yes, Sterling. I don't know that much has changed as part of their appetite for the technology. I think what's happened is our products have scaled to the point where a top 50 bank in the United States is comfortable that with close to 15 million account holders, more than $1 trillion flowing through the platform, that they can use this product. We have a track record of delivering our products on time and using it.

They're able to reference a lot of the customers, I think we referenced on the call. We have more than 46 customers that are Tier 1s now. And if you think about going public, we had one, so there's proof points now around the scale of the product. And then experience, mobility, the data we're getting is going to drive more activity up market.

And I think that we can continue to drive our products upmarket. As I've said all along, Bank of America, Wells, Chase, Citi are targets for us. But I think you're going to continue to see success in the top 50 for us with different products. And then I always got to say this, Sterling, that the bread and butter of the business are the banks and credit unions at $1 billion, $5 billion that are out there.

And what's great is a lot of those are growing to become $5 billion, $10 billion banks because it's really about does the financial institution we want to use technology as a way to compete and differentiate, and when they do, our platform seems to rise to the top of those decisions.

Sterling Auty -- J.P. Morgan -- Analyst

That makes sense. Thank you.

Operator

Next question comes from Tom Roderick with Stifel.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Hi, Matt. Hi, Jennifer. Thanks for taking my questions, and congrats on a great finish to the year. So I'm going to piggyback off Sterling's question there.

And kind of going through some of the data, if I look at that backlog number you gave, Jennifer, it looks like it's up over 26% year on year. So that's a better growth rate, I think, than we've seen all year. And then you talk about your bookings in the fourth quarter, 2x that on the renewals from what you saw last year. So if we kind of put some of those things together, I think it's more obvious now than it ever has been that the up-sell, cross-sell is making this way, way more than just the digital banking story that you guys came to market with.

So I guess the question here is, as you go into these big renewals, tell us a little bit more about the go-to-market function with respect to the up-sell and cross-sell. And I guess specifically just around the lending -- just around the leasing and the BaaS solutions here, would love to hear a little bit more. And perhaps you can address it anecdotally, when you get into some of these larger banks that PrecisionLender has serviced, what's the cross there? When you get into your own renewals, what's the appetite for the new portfolio of solutions such that they're starting the conversation, not you? Just talk a little bit more about that since it's a much more holistic platform than I think the street has been used hearing from you for a long time. Thanks.

Matt Flake -- Chief Executive Officer

Yes, Tom. So let me just try to address how we're going after the cross-sell with all of our customers. I think there's a lot of coordination going on right now between the net new sellers and the relationship management. We had our sales kickoff, and we moved it to a lot earlier in the year, so we had every seller and every relationship management person from around the globe, here in Austin, the first or second week of January.

We spent most of that time educating them on how all the different products work, how they impact the customer case studies around successes that we've had. And so now what we do is we then continue that educational process, but we begin telling that story to our customers. I think Cloud Lending is a really good example. If you think about it, we announced that deal in August of '18, incorporated their technology story into our story and then also, they were telling the Q2 story as well.

And then it takes some time to get the word out. We have an annual client conference in the spring this year. It's in April. We actually have two client conferences in the spring with CONNECT, which is ours, and then we have PrecisionLender, which is a bank on it.

And so what happens is all the customers come together, we're tight on our story. And then the results of that are Cloud Lending ends up signing the biggest deal in the history of their company in the third quarter, then they signed the biggest deal in the history of the company in the fourth quarter. And that's just time of getting the story out there with existing customers, as well as with the prospects. But the breadth of the products now, to your point, at the time we went public, we were a digital banking company that was just about retail and small business and corporate banking functionality with data analytics behind it.

We're able to walk into a bank now and talk about digital transformation and say that if you're trying to transform your bank, it's not just about accounts and balances and transfers and transactions. It's also about your relationship with your commercial customers, how do you acquire them, how do you sell and negotiate the right terms, how do you onboard them, whether it's Cloud Lending or Gro, and how do you engage with them with the digital banking platform and take that data and then ultimately optimize the relationship with PrecisionLender as well. So we're walking in with a set of products that actually allows the bank or a credit union on all Alt-FI or a fintech to begin a digital transformation story. We had a client who rolled out a product that was geared toward a savings account that where you earn miles and not interest.

They did that in less than a year. They rolled it out. They've got a lot of success with -- there's a lot of marketing around it. So we're able to really provide case studies around how this technology can transform your financial institution, and that's why you see a backlog of $1.1 billion.

We had record cross-sells in the third quarter of 2019. So educating the sales team, the relationship management team, making sure that we're making promises that we can keep around the delivery of the product and then also having examples with existing customers, where they can see it up and running and functioning. It kind of goes back to Sterling's question. That's why we're moving our way up market and that's why we're having a lot of success in the Tier 2 and Tier 3 space as well.

And then the banking-as-a-service stuff is clearly going very well. We've got more than 5 million account holders on that. So we're going to continue to invest in all these areas to make sure we clean up the kind of the global brand and global strategy stuff, you're going to see more of that in the late first, second quarter. But it's really just been a coordinated effort.

There's a lot of energy going into it, and I think you're going to continue to see that cross-pollination be a big driver of our business into 2021 and beyond.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Outstanding. Thank you. And maybe following up just a little bit in terms of some of those deals you had from the PrecisionLender and Cloud Lending side. When you talk about the biggest deal in PrecisionLender's history in 3Q and 4Q and some of the bigger deals you've seen on the Cloud Lending side, can you put that into perspective magnitude-wise, what that means relative to how we would think about a traditional Tier 1 digital banking sort of win? Do these compare comparably in size? Should we be noting that? Do they take some time to ramp? Just give us a sense as to magnitude when we start hearing about some of these big wins on the leasing and lending side.

Matt Flake -- Chief Executive Officer

Yes. So just for clarification, Cloud Lending had their biggest deal in the third quarter, and then the biggest deal top that in the fourth quarter. It wasn't PrecisionLender. But Jennifer, if you might kind of walk through the size and scale this year.

Jennifer Harris -- Chief Financial Officer

Cloud Lending. So for PrecisionLender, enterprise deal is typically about $1.5 million of ARR, whereas on a Cloud Lending deal, it's roughly $1 million. These two largest deals that they've had in the last couple of quarters, roughly $1 million. So fairly close to a large Tier 2, small Tier 1 for us.

And I would say the things to keep in mind there, we've historically said that Cloud Lending and PL were quicker time to revenue. But on these larger Cloud Lending deals, we're seeing that those take on more of an implementation that looks more like our Tier 1 North American banking deals. And so the time to revenue for those large deals on Cloud Lending is going to be closer to our Tier 1 time to revenue. And then while PL still goes to revenue much quicker.

I would also remind you that we told you that they typically, when they go into an enterprise deal, do it in a land and expand kind of strategy, so they go in and the land in certain geographies or certain lines of businesses. And then once they get a few of those rolled out, they move on to the next one. So while you may not see the initial impact right away or the full impact right away, it does grow over time.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Really good. Thank you both. Nicely done. I appreciate it.

Operator

Next question comes from Brian Peterson with Raymond James.

Brian Peterson -- Raymond James -- Analyst

Thanks for taking the questions. So I wanted to start on the renewals. Obviously, that was much bigger in the fourth quarter than it was last year, just given the long-term nature of some of your contracts, did the renewal number surprise you? And I guess I'm just curious how we should be thinking about that in terms of will cross-sell of new products drive earlier renewals or contract terms. Could you kind of sort through those dynamics?

Jennifer Harris -- Chief Financial Officer

Yes. I don't think it necessarily surprised us. If you think about it, we didn't have all but one of these large clients, we only have one large client at the time of IPO, right? And our average contract term between five and six years. So we're now about six years out from IPO.

And so you're starting to see some of those deals that were signed right after when we had 2014 and '15, two stellar years of Tier 1 wins, starting to see some of those guys come in and renew. And then our RM team is constantly out there working with the financial institutions of all sizes on their strategy for digital transformation. And any time they go in and try to cross-sell new functionality, they're also utilizing that cross-sell opportunity to add incremental time on to the existing contracts. So while customers may not be up for renewal for another two years, when they do an up-sell, they're going to take that two years and add another two years to it to push it out to where there's 48 months left on the contract.

So our RMs really did a great job in the back half of the year, focusing on getting those extensions. At the same time, they got cross-sells and the extensions. Combined with the renewals, we just had a stellar quarter.

Brian Peterson -- Raymond James -- Analyst

Understood. Understood. Well, good work there. So Matt, it sounds like the fourth-quarter execution was pretty good.

Any commentary that you have overall on the pipeline for the various parts of the business as we head into 2020?

Matt Flake -- Chief Executive Officer

Yes. Thanks, Brian. And I feel really good about the pipe for 2020. If I break it apart a little bit, I would say that the platform business continues -- the Q2 legacy platform business continues to grow.

We're doing really well in the marketplace, whether it's in Tier 1, Tier 2, Tier 3 bank or credit union. On the Cloud side of the business, really gaining momentum. And as I said earlier, I think you can reference off of Precision. Candidly, PrecisionLender pulled in that top five Canadian bank, probably a little ahead of schedule.

And as you guys know, the Tier 1s we talked about, they're tough to predict, and you work your way to the enterprise side, which is the top 100 banks. Those are even harder to predict, so I was really happy with that. I think the predictability of those is going to be more difficult and more complex. And really, what we're doing right now is trying to build the pipe in the community and regional segment.

And one of just the data point is in the fourth quarter, the number of active deals in the pipe. We've surpassed where it was in the fourth quarter already in the first quarter, 45 days into the year, so I'm seeing a lot of good momentum out of the pipe on the PrecisionLender side. It's going to take us a little time, as I mentioned, just like Cloud Lending took us about a year we're working hard to build that up to build that pipeline. And then on the Q2 Open side, they continue to not only work with the blue-chip fintechs, but we're beginning to see other verticals come into play that are looking into getting into banking-as-a-service.

So I'm happy with that as well. And so the pipe really looks strong for '20 and beyond. It's just a matter of, as we've said, we've got to continue to coordinate our message in our case studies and drive that transformation message to our prospects and customers.

Brian Peterson -- Raymond James -- Analyst

Good year. Thanks, Matt.

Operator

Next question comes from Terry Tillman with SunTrust Robinson.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Hi, Matt and Jennifer. A lot of good things to talk about here. I guess maybe what I'll focus my single question on, but multi-part question is on the banking as a service or Q2 Open side, and you talked a little bit about it. But maybe just some more color on the materiality of it.

Now you talked about 5 million account holders. I know the way this works is you get a design win that commits to you all and they start building and they start marketing the banking product. But just kind of curious, some more color on whether it's a Credit Karma or maybe some specific examples in terms of where they are in the size and scale as it relates to your bookings or revenue. Thank you.

Jennifer Harris -- Chief Financial Officer

Yes. Keep in mind, Terry, like we've always said, that the banking-as-a-service really carries a fairly small subscription revenue for the underlying software. And where we have the real upside is as these banking-as-a-service providers start taking off and utilizing debit cards and getting their account holders to adopt them and use those debit cards to generate interchange and float, etc. And so a typical monthly subscription fee for these guys is somewhere between $5,000 and $25,000, so the amount of revenue in 2019 was still just under 5% total revenue for the entire company.

And I think we're just starting to see early traction. We exited Q4, seeing some good end interchange and float coming from folks like Credit Karma. But it's difficult to predict how quick that's going to pick up and grow. So I think that's where the real upside is, and I'm optimistic that you are going to see continued strong growth there.

It's just the underlying subscription. And what's included in backlog, it's still a very small part of the overall business.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Thanks.

Operator

Next question comes from Joseph Vafi with Canaccord.

Joseph Vafi -- Canaccord Genuity -- Analyst

Hey, guys. Good morning, and great results here. Just thought I'd circle back to some of the largest customers. On their call this quarter, FIS, Fidelity National, indicated that they had three banking wins with quite large banking institutions where they were really honestly replacing homegrown systems, and was wondering how that dynamic in the marketplace, if it continues to play out is something that is a positive or a negative for your business model.

Matt Flake -- Chief Executive Officer

Yes. I don't know which products that is. But FIS and Fiserv and then some of the homegrown systems like Hogan and Systematics, which is owned by FIS, are up there. I think you're beginning to see some of the banks begin to replace more of their legacy back office systems.

We work with a lot of FIS banks, a lot of Fiserv and obviously, Jack Henry banks. And so there's multiple reasons and strategies that people are going through to replace systems. And we're in those regularly. And so FIS is, obviously, a very large company that has a lot of banks and a lot of financial institutions around the world.

So we work closely with those guys on some of our largest customers because there's back-office systems or the payment systems, and we've got to integrate to those. So it's just kind of emblematic of what's going on right now, which is there's an investment in your IT spend. And if the bank is using an old homegrown core processor, it may not have the openness or the APIs, they need to do things. And so it's just part of the transformation that's occurring.

Joseph Vafi -- Canaccord Genuity -- Analyst

OK. That's helpful. And then just strategically here, I mean, the portfolio is getting pretty big. Is there still room for more larger deals? I know PrecisionLender was obviously your biggest deal to date, but how is the appetite on the M&A front right now? Thanks.

Matt Flake -- Chief Executive Officer

Yes. Thank you. We're focused on integrating these companies, integrating our story, our land and expand go-to-market strategy in 2020. And no plans to do any meaningful transactions.

We have nothing in the works right now in 2020, we really want to absorb the lending side of the business with the deposit side of the business and make sure we get a lot of headway in 2020 before we do another deal. Thanks, Joseph.

Operator

Next question comes from Bob Napoli with William Blair.

Bob Napoli -- William Blair and Company -- Analyst

Thank you and good morning. Just another question on the renewals. I was wondering if you could give a little color on, as you're doing these renewals, what is the size of the deals versus the original deals, the number of products that you're selling. And then is there any trend on pricing? I mean, as these are larger deals, do you have more -- do you have some pricing power given your history? Or because these are larger deals, is there some price giveback to your customers?

Jennifer Harris -- Chief Financial Officer

Yes. We have obviously had a lot of innovation over the last couple of years. And so as our customers have grown their account holder base and put pressure on us for volume discounting because of their growth, we've been able to add in new products and services to help offset that such that, obviously, you're seeing the increase in the trailing 12-month revenue retention, right, from 114% last year to 120% this year, so we're able to maintain price. And then, of course, with the addition of the lending solutions, that just gives us more opportunity to further up-sell and lift the pricing.

Bob Napoli -- William Blair and Company -- Analyst

OK. Thank you. And then I guess the organic growth was around 25% in the quarter. I was wondering if you could give a little bit of color about -- I mean, you talked a lot about the corporate products, BaaS and the Cloud Lending.

Which products are growing? Can you give some color for the growth rates for the various products? Or what is growing well above the average and what is growing below the average?

Jennifer Harris -- Chief Financial Officer

I think corporate is a big piece of it. Corporate is growing faster, as well as Q2 SMART. And then...

Matt Flake -- Chief Executive Officer

Centrix.

Jennifer Harris -- Chief Financial Officer

And Centrix. Yes, which I kind of lumped in with the corporate and the commercial functionality.

Bob Napoli -- William Blair and Company -- Analyst

Great. Thank you. Appreciate it.

Matt Flake -- Chief Executive Officer

Thanks, Bob.

Operator

Next question comes from Mayank Tandon with Needham.

Mayank Tandon -- Needham and Company -- Analyst

Thank you. Congrats on the quarter. Jennifer, could you talk a little bit about the gross margin trajectory? Just want to get a feel for how that trends through the year. And on that same note, I wanted to get a better sense of are you seeing more SI partners now come to you given the larger size of the deals.

Does that create an incentive for them to work more closely with you given the larger deals in terms of scope and size? Thank you.

Jennifer Harris -- Chief Financial Officer

Yes. As I mentioned in my prepared remarks, we expect our margins to really be impacted in the first half of the year, right, with a steep ramp in Q4. And so from a gross-margin perspective, I would expect in the first half of the year that you're going to see it somewhere in the low 50% before returning to a near mid-50s in Q3 and then exiting the year in the mid- to high 50s. And I would expect that the full year will be very similar to the full year of 2019, so somewhere right around 54% for the full year.

Matt Flake -- Chief Executive Officer

And then on the systems integrators, on the Cloud Lending side, we've partnered with SIs before, and we'll continue to find more opportunities globally. There's more opportunity there. And we have some of them we're working in the U.S. with also on the platform.

We're beginning to use systems integrators for various things, whether it's people want to do certain things with the SDK, where they want to open up their system and systems integrators are coming to play there, but no meaningful change on SIs on the platform side, not really any need for them on the PrecisionLender business. And Q2 Open doesn't use many systems integrators. But on the cloud side, you'll see more of it. And then the platform, we're starting to experiment with some of them and that could be an opportunity for us.

Operator

Next question comes from Peter Heckmann with Davidson.

Peter Heckmann -- D.A. Davidson -- Analyst

Good morning. Thanks for taking the question. Around growth, I'm always surprised that the shift in larger banks. Only adding a net 13 banks to your customer count but still generating this type of growth really indicates success in the top tier.

Could you comment, in terms of your guidance for 2020, what type of organic growth on a GAAP and non-GAAP basis does that contemplate, something in the 20%, 22% range?

Jennifer Harris -- Chief Financial Officer

Yes. That's exactly what it contemplates, something in the 20% to 22% range with the PrecisionLender business, obviously growing much quicker than that.

Peter Heckmann -- D.A. Davidson -- Analyst

Great. Thank you. And then can you talk a little bit just about the outlook. I know we've had some unusually large mergers that have helped to diversify the product set, and that's suppressing margins.

But can you give us an update on how you think about this business evolving over the next three or four years? What types of aspirational margin target should we be thinking about?

Jennifer Harris -- Chief Financial Officer

I think we've said that the core business before some of these recent acquisitions could get to a 60-plus percent margin. It would be hard to get to 70% or 75% because of our individual instances for each bank and the security costs that we have in this highly regulated market. But with the acquisition of Cloud Lending and PrecisionLender being true native-cloud SaaS applications, they don't have the underlying data center infrastructure and infrastructure costs that we have in the business. So I think as those pieces of the business continue to grow and contribute a larger portion of our overall total revenue, you could actually see the gross margins expand beyond that 60% to 65%, 70% over the longer term.

But right now, there's such a small piece of the business. It's just going to take a while to get there.

Peter Heckmann -- D.A. Davidson -- Analyst

And what would that translate into, like the EBITDA line?

Jennifer Harris -- Chief Financial Officer

Well, I don't see them bringing any different operating costs. So I think the increase in gross margin would fall mostly through to the EBITDA margins as well.

Peter Heckmann -- D.A. Davidson -- Analyst

Thank you.

Matt Flake -- Chief Executive Officer

Thanks, Pete.

Operator

Next question comes from Andrew Schmidt with Citi.

Andrew Schmidt -- Citi -- Analyst

Matt, Jennifer, congrats on the good start to the year here. First question, just wanted to get a little more context around the FY '20 revenue outlook. Obviously, it's election year. There's always some uncertainty.

I was wondering to what extent you've built some uncertainty quotient into the outlook. And just maybe some general context in terms of how you built that revenue outlook up would be helpful.

Jennifer Harris -- Chief Financial Officer

I don't know that we've necessarily built a lot into the core business because remember, with our time to revenue even in the Tier 2, Tier 3 space being six or seven months, it's only really the bookings that we signed in the first quarter of the year that impact the current year revenue. So I think we've got good line of sight and visibility with our existing business. and where it could impact, I suppose, is the PrecisionLender where we told you it's much quicker time. But they have so many other variabilities besides just the macro environment or the election, etc., such as they really just entered this enterprise space and won a couple of big deals lately.

But it's going to take some time for us to work through and figure out what the more complex sales cycles that Matt mentioned for those guys, exactly what it looks like, how those deals evolve in the pipeline over time, how they get closed out. And then what is the true time to revenue based on the land and expand strategy that most of them take. And so that, I think, provides more variability into our revenue model than what we've had historically. But I feel very confident about what we've included in our current-year guide.

Andrew Schmidt -- Citi -- Analyst

Got it. That's helpful. And then just on PrecisionLender, I understand that the acquisition just closed in the fourth quarter, maybe a little bit more context around what you've done from an integration and investment perspective thus far and then what remains to be done as the year progresses. That would be helpful.

Matt Flake -- Chief Executive Officer

Yes. So as far as putting the companies together, like we're just over 100 days into owning the business. And what we've really tried to do is learn as much as we can about their business and educate our sellers and our relationship management across the board on how the products work, how they can solve problems for our customers, deepen relationships with their commercial customers. And then also there's an element of the platform, as well as Cloud Lending in that.

And so that's really where we've started. We've begun actually to integrate Andi and their machine learning tool with some of our products. That's early, but we're seeing some really interesting opportunities there. And so there's going to be more to come.

But 100 days in, it's mostly been around not disrupting the pipeline, making sure that the PrecisionLender sellers know how to sell the Q2 story and vice versa. So that's really where the investment has gone. We really want to make sure that those guys continue the momentum that they had and just add to it by driving more opportunities, really build out that community and regional space for them because that's what they didn't have. They didn't really have any sellers in that space.

And we're going to continue to invest in the enterprise selling side for them as well.

Andrew Schmidt -- Citi -- Analyst

Got it. Thank you very much, guys. Congrats again.

Operator

Next question comes from Brett Huff with Stephens.

Brett Huff -- Stephens Inc. -- Analyst

Good morning and congrats on all the Tier 1 wins, guys.

Matt Flake -- Chief Executive Officer

Thanks, Brett. Appreciate you hanging in there.

Brett Huff -- Stephens Inc. -- Analyst

Two questions for me. One is just to dig in a little bit on the -- I think you said $4 million of inorganic, and that was less than we thought. And I just want to make sure that we're getting that right. How much of the stub of Cloud Lending still showed up in that inorganic and Gro, I think, is a little piece still in PrecisionLender.

Any color on how we divided that $4 million?

Jennifer Harris -- Chief Financial Officer

That $4 million was strictly PrecisionLender. And it was two months for November and December, we closed on the deal October 31. So that $4.3 million was all PrecisionLender. We did not include -- we did not split out the revenue from Cloud Lending or Gro in the fourth quarter.

Brett Huff -- Stephens Inc. -- Analyst

OK. But we closed Cloud Lending on October 16 last year. So there was still, what, a couple of months of inorganic -- maybe half a quarter of inorganic from Cloud Lending still, but that was on top of the $4.3 million from Precision?

Jennifer Harris -- Chief Financial Officer

That's correct.

Brett Huff -- Stephens Inc. -- Analyst

OK. I just wanted to make sure I understood that. And then the second question is, your rev per user has been going up nicely, I kind of think that's probably from just mix, corporate and things like that. But even from a platform point of view, what are the drivers of that? As you mentioned, probably you go upmarket, you get less per user just generally on the consumer Internet, but maybe you're selling more cross-sell corporate.

Or are there other things there that we should expect going forward? Thank you.

Jennifer Harris -- Chief Financial Officer

Yes. I think the other thing to remember is that the registered user number we give you is the registered users just on the Q2 digital banking platform. And then the revenue that you're looking at is inclusive of things like Open, Cloud Lending, the last two months had PrecisionLender. So that's driving part of that increase, but within the digital banking market, it's exactly what you pointed to.

We've talked a lot this year -- or in 2019 about the success that we've seen on the corporate side. And the corporate side brings a higher per user cost but also a much smaller number of users than the retail side, so the mix shift is also driving it up.

Brett Huff -- Stephens Inc. -- Analyst

Great. Thanks for the help.

Jennifer Harris -- Chief Financial Officer

Thanks, Brett.

Operator

And we have a question from James Faucette with Morgan Stanley.

James Faucette -- Morgan Stanley -- Analyst

Thank you. Most of my questions have been answered. I just want to ask a couple of follow-ups. On PrecisionLender, it seems like you're looking to achieve some improved efficiencies in that and synergies as we go through 2020.

Can you give us a little bit of detail on not only just timing but how much of the implied second-half inflection in EBITDA that you're expecting to come from synergies versus just increased volume and leverage across the rest of the business?

Jennifer Harris -- Chief Financial Officer

What I would say on the synergies is it's relatively immaterial from an existing business perspective. The synergies that we're really talking about is, if you remember, PrecisionLender was just entering the international market. And they had a very small footprint in London and also Sydney, where we already have a footprint with Cloud Lending. And we've also got the international infrastructure, as well as the G&A infrastructure here with the corporate group to be able to allow them to spend the money that they would have had to spend, investing in growing those areas and growing their administrative and support staff.

They can really put that now into growing their sales staff and doubling down to increase their pipeline. So that's where the efficiency is really coming from, and that's on the back half of the year, like we said.

James Faucette -- Morgan Stanley -- Analyst

Got it. And then can you just -- I think you've kind of alluded to this, but just looking for a little clarification of how you're thinking about and what you're seeing in your core digital banking pipeline. I guess we keep hearing about increased competition and wondering who you're seeing there and how you're feeling about your win rates.

Matt Flake -- Chief Executive Officer

Yes. The competitive market is still Fiserv, FIS, Jack Henry, on the retail, small business products. And then ACI, Bottomline, some FINASTRA or Fundtech technology out there on the corporate side of the business. There's some -- I don't want to call them newer players that are retail-focused that we run into.

In the Tier 1s, we've got to be winning at 50% or greater. Tier 2 is still around that range. Tier 3, the win rate is a little lower, the volume is a little higher. But we're still doing very well competitively.

You can see that in the numbers and the growth and the retention. So feel good about the win rates where we are, and our competitive differentiation is the product suite continues to grow.

James Faucette -- Morgan Stanley -- Analyst

That's great. Thank you so much.

Operator

And at this time, I'll turn the call over to the presenters.

Matt Flake -- Chief Executive Officer

Sorry, we ran out of time with everybody. There's a couple of questions that are left. We'll follow up with you later, but we certainly do appreciate everybody joining us today. We look forward to updating you on our progress at the next quarter's call.

Thank you very much.

Jennifer Harris -- Chief Financial Officer

Goodbye.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Steve Calk -- Director of Investor Relations

Matt Flake -- Chief Executive Officer

Jennifer Harris -- Chief Financial Officer

Sterling Auty -- J.P. Morgan -- Analyst

Tom Roderick -- Stifel Financial Corp. -- Analyst

Brian Peterson -- Raymond James -- Analyst

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Joseph Vafi -- Canaccord Genuity -- Analyst

Bob Napoli -- William Blair and Company -- Analyst

Mayank Tandon -- Needham and Company -- Analyst

Peter Heckmann -- D.A. Davidson -- Analyst

Andrew Schmidt -- Citi -- Analyst

Brett Huff -- Stephens Inc. -- Analyst

James Faucette -- Morgan Stanley -- Analyst

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