Q4 2019 Earnings Call
Sure if he'd like to ask a question. During this time. Please press Star then the number one on your telephone keypad. Thank you I'll now turn the call over to Steve Calk Director of Investor Relations. Sir Please begin.
[music]. Thank you operator, good morning, everyone and thank you for joining us for a fourth quarter and full year 2019 conference call with me on to call today, as Matt Flake, our CEO and Juniper Harris our CFO.
This call contains forward looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance in 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 could differ materially from those reflected in the forward looking statements are included in our periodic reports filed with the FCC, including our most recent annual report on form 10-K, and subsequent filings in 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 disgust investors should not assume that these statements will remain operative at a later time and we undertake no obligation to update any such forward looking statements discussed in this call.
Also unless otherwise stated all financial measures discussed on this call 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 FCC yesterday.
Good afternoon.
Now, let me turn the call over them Uh Huh.
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 more detailed look at our 2019 financial results.
As well as guidance for the first quarter and full year 2020.
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 500000 users in the fourth quarter ending the year with 14.6 million users on our platform a year over year increased 14%.
2019 was a transformational year for Q2, we continue to meaningfully expand the functionality of our digital banking platform as well as our customer footprint in the digital banking space.
Commercial capabilities bolstered by our acquisitions of cloud lending and precision lender have a quipped us to partner with some of the largest and most progressive financial institutions in the market and we added several of these customer 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 corporate 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 fin techs in the country to partner with community financial institutions.
2019 also marked our evolution of the digital lending space and I'm pleased with cloud lendings contributions to the business in their first full year as a part of Q2.
Sales team is performing at a high level and our existing customer base continues to ask for health and 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 precision lender.
And finally in 2019 was our first full year, but 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're we're 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.
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 the commit.
Good backlog of over $1 billion.
First our digital banking platform team signed two tier one financial institutions, making a 10 straight quarters with at least one new tier one platform side.
We believe our consistency in the tier one segment is isn't an encouraging sign that our products are resonating in this space and I've been pleased with our sales teams ability to effectively expand our presence within the tier one mark as an example, one of the tier ones, we signed in the fourth quarter as a top 50 U.S. bank that selected our digital banking platform.
For small business in 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 breath of our corporate banking sweet put us in position to compete for and ultimately when 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 were commercial banking is a critical component of their strategies.
When you combine our corporate banking suite with our expanded commercial lending capabilities, we have a compelling solution to help clients when more commercial loans more efficiently.
And then onboard those relationships onto our corporate banking platform.
In addition to helping land this tier one 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 a 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.
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 Cleveland each history.
This is 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 then the fourth quarter plus on the single largest deal in its history with a major alternative lender in North America.
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 your success. There is a long road ahead of us, but the talon knowledge and passion of the cloud team have exceeded our expectation.
Following our close of the precision lender acquisition in November the team has signed multiple deals with two I'd like to highlight the first as with the $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 Q twos banking platform with precision lender was a key differentiator and I'm optimistic this will be the first of many precision lender deals with existing Q2 customers.
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 to come to fruition. Following the acquisition leads me to believe that the market is viewing the combination of Q2 and precision lender as a positive.
Given how the new precision lender products are to the Q2 story I want to take a moment to illustrate the power of the precision lender suite by way of real World example.
Today virtually every commercial lender is forced to compete on rate frequently leaving him to decide between losing money on a lending deal we're losing the deal altogether.
Instead of working from a static spreadsheet precision lender gives the commercial banker instead of intelligent tools that leverage close to two trillion dollars worth of loan data to deliver in the moment sales coaching structuring and pricing recommendations.
As the banker put these recommendations into play precision lender 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 and outcome that when applied across in institutions portfolio can have a meaningful impact on revenue profitability and client relationships. While it's early innings with precision lender 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're optimistic about what 2020 hasn't 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 Tom 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 and assets compared to only a handful at the time of our IPO across our entire portfolio, we have a third of the.
Top 100 us banks on our customer roster.
None of this happens without the investment in hosting security and the innovation these institutions increasingly demand from their technology vendors.
I'm a registered user perspective, we ended the year was 14.6 million end users on our digital banking platform.
Those 14.6 million users moved over a trillion dollars through the Q2 platform compared to $200 billion at the time of our IPO.
Well the Raul growth in digital banking traffic, we see is partially due to the growth of our user base users are accessing the in their institutions 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 platforms 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 you.
I mean, 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 precision lender.
And as an engagement on our platform in 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 evidenced a 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 where 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'd say I believe our success in 2019 help solidify our position as a leader empowering 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 were to Jennifer to discuss our fourth quarter and full year results and guidance for the first quarter and full year 2020.
Thanks, Matt I'll begin by reviewing our results for the fourth quarter and full year of 29 team before finishing with guidance for the first quarter and full year 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 and given the sizable deferred revenue balance acquired from precision lender 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 2019 was $317.3 million up 32% year over year.
Approximately $4 million at the sequential and year over year increase for the fourth quarter was generated from the inclusion of precision lender revenue in our results of operations for the month 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 is a surge.
Okay 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 29 team compared to 16% for the full year of 28.
The decline in transaction revenue as a percentage of total revenue is attributable to the increased subscription revenue generator for precision lender as well as continued slowing growth in bill pay revenue.
Matt mentioned Q4, 2019, with 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 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 one win contributed to a committed backlog for the existing business, excluding precision lender of over $1.1 billion as of December 30, Onest 2019.
Approximately $138 million from the end of last quarter.
In addition, the acquisition of precision lender in the fourth quarter added approximately $27 million to the total year in backlog, excluding the impact of any reduction in deferred revenue as a result and purchase accounting.
Our revenue churn for 2019 was consistent with prior years at 5.1%.
Ultimately, 35% of the churn was the result of M&A activity within the industry and churn from acquired businesses added approximately half of a percent to the total.
I continue to anticipate churn to remain at approximately 5% for 2020.
Our Q2 platform installed customer count at the end of the year was 414.
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 a 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 precision lender solutions added in Q4, 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 this occur.
One show 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 precision lender also improved both our sequential and year over year margins.
Total operating expenses were $43 million up 24% from a year ago period end up 7% from the previous quarter.
Both the year over year and sequential increase in operating expenses were driven primarily by head count additions and the related increase in employee benefit costs.
As we ended the year with 1500 74 employees up from 1100 90 at the end of 2018 with approximately 150 of those employees being added as a result of the precision lender acquisition.
In addition, the expansion of our businesses globally with the acquisitions of cloud lending in Q4 of 2018 and precision lender in Q4, 2019 brought with them increase 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 control international immigration cost 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 precision lender acquisition.
Without the impact of the precision lender 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 for 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 third quarter.
Cash flow from operations for the fourth quarter was $1.9 million and we generated free cash flow of approximately $350000 operating and free cash flow were offset by approximately $510 million paid for the acquisition of precision lender.
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 29 team, 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 precision lender acquisition and the timing of any expected synergies.
In summary, 2019 was another strong year of solid execution for Q2, as we delivered strong bookings and renewal, 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 precision lender combined with the tier one 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 map for his closing remarks.
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 enhance 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 2000.
The 19 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 financial services banks spend on key continues to grow and newer entrants to the space like syntax and all that buys are gaining traction and looking to expand their capabilities with our current solutions portfolio, we believe our mark.
He 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.
If you'd like to ask a question at this time. Please press Star then the number one on your telephone keypad. If he would like to withdraw your question press the pound Keith Please limit yourself to one question. Your first question comes from Sterling Auty with JP Morgan.
Yes, thanks, guys.
Question, one follow up maybe just start with a housekeeping question [noise].
[music].
Sorry, Sterling could you repeat that.
Yes [laughter].
Good question and the press release the table. The batch of died in the revenue numbers consultants reconcile what happened there versus the guidance that you gave at the beginning of the press release.
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.
And corrected Crestor released last night and an amended 8-K. This morning, so I apologize for that clerical error.
No problem. Thank you for that and then Matt.
And Jeff.
When I take back to the IPO.
Talk was your addressable market was really all the banks and credit unions below the top 75 Boes top 75 seem like they're almost untouchable given the investment in their own solution. So what I see winning business with a top 50 bank in the us really kind of March so to speak change.
And I'm curious what do you think has changed in the mindset of those top that you're 75 with the solutions portfolio that you have what do you think the opportunity we did that no highest level of institutions are for you going forward.
Yes, certainly so I think.
I don't know that.
Much has changed as far as their appetite for the technology I think what's happened is the is our products has scaled to the point, where a top 50 bag in the United States is comfortable that with a close to 15 million account holders more than a trillion dollar flow into 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 ones now and if you think about going public we had one so.
There's 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 that we can continue to drive our products of market is.
I've said, all along bank of America Wells Chase City, our 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 going to say the sterling that.
The bread and butter the business are those those banks and credit unions that billion 5 billion that are out there and whats great is a lot of those are growing to become $510 billion banks, because it's really about does the financial institution want to use technology is way to compete and differentiate and when they do our platform seems the rise of the top of the.
Decisions.
Makes sense. Thank you.
Thanks Sterling appreciated next question comes from Tom Roderick with Stifel.
Hey, Jennifer Thanks for taking my questions and congrats on a great finished the year. So I want 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, two X 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 that the upsell cross sell.
As making this way way more than just the digital banking story that 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 but to go to market function with respect to the upsell and cross sell and I guess, specifically just around the lending alright, just around the leasing and the bass solutions here would love to hear a little bit more and perhaps you can address anecdotally when you get into some of these larger banks that precision lender has serviced what's the cross sell there.
When you get into your phone renewals, what's the appetite for the new portfolio of solutions such that they are starting the conversation not you just talk a little bit more about that sense. It's much more holistic platform. Then I think the street has been used to hearing from you for a long time. Thanks.
Yes, Tom so.
Let me just trying 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 in the relationship management, we had our sales kick off and we moved it to a lot earlier in the years with 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 as we then continue that educational process, but we begin telling that story to our customers I think cloud lending is or.
Ample 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 to cut client conferences in the spring with connect which is ours and then we have.
Ladies and lenders which is.
Bank on it and so what happens is all the customers come together were tied on our story and then the results of that our cloud lending ends up signing the biggest deal in the history of their company in the third quarter than 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 that with existing customers as well as with with the prospects, but the breadth of the products now to your point of the Tom on public we were digital banking company that was just about retail and small business and corporate banking functionality with data analytics behind it we are able to walk into a bank now and talk about digital transformation and say that if you.
We'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 sales and negotiate cell and negotiate the right terms, how do you onboard them, whether its cloud lending or grow and how do you engaged with them with the digital banking platform and take that data and then ultimately optimize the relationship with.
Our precision lender as well so we're walking in with a set of products that actually allows the bank or credit union or an all fire fintech to begin a digital transformation story, we had a client who rolled out.
A product that was that was geared towards.
So a savings account that where you earned miles and not interest they did that in less than a year. They rolled it out they've got a lot of success whats theres 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 over 1.1 billion dollar.
As 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 at kind of goes back to Sterling's question. That's why we're movement our way of market and that's why we're having a lot of success on the tier two.
Tier two in tier three 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 and all these areas make sure we clean up the kind of the global brand a global strategy stuff, you're going see more that in the in the late first second quarter, but it's just it's really just been a coordinated effort. There is 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 ended 2021 and beyond.
Outstanding Thank you and.
Maybe following up just a little bit on in terms of some of those bigger deals you've had from the precision lender cloud lending side. When you talk about the biggest steel in precision lenders history in Threeq and Fourq, you and some of the bigger deals you've seen on the on the cloud lending side can you put that into perspective magnitude wise, what that means relative to wildly.
We would think about a traditional tier one digital banking sort of when do these did these compare comparably in size should we be.
You should we be noting that the they 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.
The on the on the on the leasing and lending side.
Yes, so just for clarification cloud lending had their biggest deal in the third quarter and the Big and then the biggest deal topped out in the fourth quarter. It wasn't precision lender, but generally but kind of walk through the size and scale doses.
Cloudlens.
So for precision lender enterprise deal as is typically about 1.5 million of a are.
Whereas on a cloud lending deal, it's roughly a million. These two largest deals that they've had in the last couple of quarters roughly a million so.
Fairly close to.
A large tier two small tier one for us and I would say you know the things to keep in mind, there Weve historically said that cloud blending NPL.
Quicker time to revenue, but on these larger cloud lending deals were seeing that those take on more of a.
Implementation that looks more like our tier one 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 one time to revenue and then while PL still goes to revenue much quicker I would also remind you that we told you.
You know that they typically when they go into an enterprise deal do it in a land and expand kind of strategy. So they go in land in certain geographies or certain lines of businesses and then once they get a few of those rolled out they move onto the next one so why you may not see the initial impact right away or the full impact right away.
It does grow over time.
Really good. Thank you both nicely done I appreciate it.
Thanks, Don Thank you.
Next question comes from Brian Peterson with Raymond James.
Thanks for taking the questions. So wanted to sort out 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 did the renewal number surprise you and I'm just I'm just curious how we should be thinking about that in terms of will cross sales of new products drive earlier.
Renewals or contract terms you try to start do those dynamics.
Yes, I don't think it necessarily surprised just if you think about it we didnt have.
All but one of these large clients, we only had one large client at the time of IPO right in our average contract term is between five and six years. So we're now about six years out from IPO and say you're starting to see.
Some of those deals that were signed right. After when we had 2014 or 15 to stellar years of tier one when 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 anytime they go in and try to cross sell new functionality. There also utilizing that cross sell opportunity to add incremental time onto the existing contracts. So while customers may not be up for renewal for another two years.
Here is when they do an upsell, they're going to take that two years and add another two two years to act to push it out to where there's 48 months left on the contract so.
Rams really did a great job in the back half of the year focusing on on getting those extensions at the same time, they got cross sells and they extensions combined with the renewals.
We just had a stellar quarter.
Understood understood well good work there so that sounds like the four corrects accusing was pretty good any commentary that you have overall on the pipeline offer the various parts of the business as we head into 2020, thanks guys.
Yes, Thanks, Brian.
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 one tier two tier three banker 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 precision lender pulled in that Topfive Canadian bank.
Probably a little ahead of schedule and as you guys know the tier ones, we talked about their tough to predict and you work your way to the enterprise cyber to the top hundred banks.
Other even harder to predict so I was really happy with that I think.
Those are the predictability those is going to be more difficult to 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 the just a data point is.
In the fourth quarter, the number of active deals in the pipe, we surpassed what Wasnt <unk> wasnt the fourth quarter already in the first quarter.
45 days and ended the ended the year, so I'm seeing a lot of good momentum out of the pipe on the precision lender 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 Bluetooth 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 and so the pipe that really looks strong for 20 and beyond its just a matter of as we've said we've got to continue to coordinate our message our case studies and drive that transformation message to our prospects and customers.
Good to hear thanks, Matt.
Thanks next question comes from Terry Tillman with Suntrust Robinson.
Hey, Matt Jennifer a lot of lot of did things to talk about here I, just maybe what I'll focus my.
Single question on but multipart question is on the banking service for Q2 open side and you talked a little bit about it.
But maybe just some more color on the materiality of a now you talk about 5 million account holders.
I know that way. This works is you get a design win.
Lets you all and they are building and the start marketing the new 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.
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 as as these banking as a service provider start taking off and utilizing debit cards and getting their account holders to adopt them and use those debit cards to generate interchange in flowed et cetera.
And so you know a typical.
A typical monthly subscription fee for these guys is somewhere between.
I haven't 25 K.
So the amount of revenue in 2019 was still just under 5% of total revenue for the entire company.
And I think we're just starting to see early traction we exited Q4 seeing some good interchange in flow coming from folks like credit Karma.
But.
It's difficult to predict how quick thats going to pick up and grow so I think thats, where the real upside is an I'm I'm I'm.
Optimistic that that you're 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 part of the overall business.
Thanks, Thanks Terry.
Next question comes from Joseph Vafi with Canaccord.
Hey, guys good morning, and a great results here.
Got to circle back to some of the largest customer zero on on their call. This quarter fire stability national indicated that they had three banking wins with.
Right large banking institutions, where they were really obviously, replacing homegrown systems and.
Wondering how that dynamic in the marketplace continues to play out is.
As something that is.
It is.
Positive or negative for your business model.
Yes.
I don't know, which products that is far less than five serve and then some of the home grown systems like.
Hogan and systematics, which is owned by us or up there I think you're beginning to see some of the banks began to replace more their legacy back office systems, we work with a lot I if I ask thanks, a lot of Pfizer, but obviously, Jack Henry banks, and so if there's multiple reasons and strategies that people are going through to replace cyst.
Comes and where in those regularly.
And so.
By us as a obviously a very large company that has a lot of banks in a lot of financial institutions around the world. So we work closely with those guys on some of our largest customers because.
They are the 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 is an investment in your ITC spend in it for banks using an all home grown core processor or it may not have the openness or the eyes that need to do things and so it's just part of the transformation that's occurring.
Okay. That's helpful. And then just strategically here I mean, the portfolios getting pretty big is there still room for.
More larger deals I know precision lender was.
Obviously, your bigger steel to date, but.
How's the appetite on the M&A front right now thanks.
Yes, Thanks, just we're focused on.
Integrating these companies integrating our story, our land and expand go to market strategy in 2020.
No plans to do it in 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, just.
Next question comes from Bob Napoli with William Blair.
Hi, Thank you and good morning.
Just another question on the renewals I was wondering if you could give a little color on as you are doing these renewals are.
What is the size of the of the deals versus the original deals. The the number of products do you are selling and then is there any trend on pricing I mean as these are larger deals or do you have more do you have some pricing power given your history or.
It is because these are larger deals is there some.
Price give back to your customers.
Yes, we've 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 as a 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.
Okay. Thank you and then yes, the organic growth was around 25%.
In the quarter was wondering if you could give a little bit of color about which have you talked a lot about the corporate products.
Bath and.
The cloud lending, which products are growing and it can you give some color for the growth rates of the various products or what is growing well above the average and what is growing below the average.
I think corporate is is a big piece of at corporate is growing faster as well as Q2 smart.
And then.
Centric and centric, Seattle, which I kind of lump and with the corporate and the commercial functionality.
Great. Thank you appreciate it.
As Bob.
A question comes from Miami tend on with Needham.
Oh. Thank you congrats on the quarter agenda for could you talk a little bit about the gross margin trajectory just wanted to get a feel for how that should trend through the year and on that same note I wanted to get a better sense of up are you seeing more ESI 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 a given the.
Larger deals and storms of scope and size. Thank you.
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 Fiftys in Q3, and then exiting the year in the mid to high Fiftys and I would expect that the full year, we'll be very similar to the full year of 2019 to somewhere right around 54% for the full year.
And then on the systems integrators.
Lending side, we partner with us size before.
And we'll continue to find more opportunities globally, there's more opportunity there and we have some the working in the US with also on the platform. We are beginning to use systems integrators for.
Various things whether its.
People want to do certain things with the SDK, where they want to open up their system and systems integrators are come into play there, but no meaningful change on that size on the platform side, not really any need for them on the on the on the precision lender business and Q2 opened doesn't use many systems integrators drama cloud side, you'll see more of it and then the platform we're starting to.
To experiment with some of them in that could be an opportunity for us.
Great. Thanks, Mike.
Next question comes from Peter Heckmann with Davidson.
Hey, good morning, Thanks for taking the question.
I am always surprised at the the shift in larger banks I only only only adding a net 13 banks to your customer accounts that still generating this type of growth really indicate success in the top tier could you comment in terms of your guidance for 2020, what type of organic.
The growth.
On a GAAP and non-GAAP basis does that contemplate something in the 2020, 2% range.
Yes, that's exactly what it contemplates something in the 20% to 22% range with.
The precision lender business, obviously growing much quicker than that.
Great. Thank you and then can you talk a little bit just about the outlook I know you've had some unusually large mergers that have helped diversified products that and thats depressing margins, but.
Can you give us an update on how you're thinking about this business evolving over the next three or four years, what types of operational margin target should we be thinking about.
I think we said that the core business before some of these recent acquisitions could get to 60 plus percent margin 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.
Five blending and precision lender being true native cloud SaaS application. 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 60, 570% over.
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.
And what would that translate into like the EBITDA line.
Well I think I don't see them, bringing any different operating cost. So I think the increase in gross margin would fall mostly through to the EBITDA margins as well.
Okay. Thank you.
Thanks, Pete next question comes from Andrew Smith with Citi.
Hey, Matt Jennifer Congrats and good start to the your here.
Thanks.
First question just wanted to give them a context around the F 20 revenue outlook.
Obviously selection 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 bill that that revenue outlook.
Would be helpful.
You know.
I don't know that Weve necessarily built a lot in to the core business because remember with our time to revenue even in the tier two tier three space being six or seven months, it's only really the bookings that we sign 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 Ari.
Distinct business.
Okay, and where it could impact I suppose is the precision lender, where we've told you at much quicker time, but they have so many other variabilities. Besides just the macro environment or the.
The election et cetera, such as you know they really just entered this enterprise space and and won a couple of big deals lightly, 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 evolved in the pipeline overtime, 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 you know 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.
Got it that's helpful. And then just on precision lender I understand that the acquisition just close in fourth quarter, maybe a little bit more context around.
What you've done from integration investment perspective, thus far and then what remains to be done this year progresses that would be helpful.
Yes, so as far as.
Put the companies together like were 100, just over 100 days into owning the business and what we've really tried to do is learn as much as we can't about their business and then educate our sellers in a 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 the cloud lending in that and so.
That's really where we've started we've begun actually to integrate Andy there their machine learning tool with some of our products. Those are best early but we're seeing some really interesting opportunities there.
So theres the can be more to come but a 100 days then it's mostly been around not disrupting the pipeline, making sure that there's the precision lender sellers know how to sell the Q2 story and vice versa, So thats really where the investments gone.
We really want to make sure that those guys continue the momentum that they had and then just add to it by driving more opportunities really build out that that community and regional space for them because that's what they didnt have the 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.
Got it. Thank you very much guys. Congrats again congrats.
Next question comes from Brett Huff with Stephens.
Good morning, and congrats on all the tier one wins guys.
Thanks, Brett I appreciate you hanging in there.
Two questions for me one is just to dig a little bit on I think you said $4 million of inorganic and that was.
Than we thought and I just want to make sure that we're getting that right is that how much of the stub of cloud lending still showed up in that inorganic and grow I think is a little piece still.
In precision lender is any color on how we divide up that 4 million.
That that 4 million was strictly precision lender so that okay.
And it was two months for November and December we closed on the deal October 31, so that 4.3 million with all precision lender. We did not include we did not split out the revenue from from cloud lending or grow in the fourth quarter.
Okay, but we still close cloud lending on October 16 last year. So there was still up what a couple of months of inorganic.
Yeah, maybe half a quarter of inorganic from cloud lending still but that was on top of the 4.3 from precision.
That's correct. Okay. That's what makes you understand that and then the second question is your rent per user then going up nicely I kind of think thats, probably from just mix corporate and things like that but even from a platform point of view what are the drivers of that is it.
As you mentioned probably go up market you get less per user just generally on the on the consumer Internet, but maybe you are selling more cross sell corporate are there other things there that we should expect going forward. Thank you.
Yeah, I think the other thing to remember is that the registered user number. We gave you as the registered users just on the Q2 digital banking platform and then the revenue that Youre looking at is is inclusive of things like open cloud lending the last two months' had precision lender.
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.
In the corporate side brings a higher per user cost, but also a much smaller number of users than that retail side. So the mix shift is also driving it up.
Great that's way to thanks for that.
Thanks, Brett.
We have a question from James Fossett with Morgan Stanley.
Thank you most of my question's been answered I just want to ask a couple of follow ups on precision lender. It seems like you're looking to achieve some.
Improved efficiencies than 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 second implied second half inflection in EBITDA is you're expecting to come from synergies versus just increased volume and and and leverage.
Cross the rest of the business.
You know what I would say on the synergies is it's it's relatively immaterial from an existing business perspective, the synergies that we're really talking about as if you remember precision lender was just entering the international market and they had a very small footprint in London.
And also said knee, where we already have a.
Footprint with cloud lending and we've also got the international infrastructure as well as the Gionee infrastructure here wed.
Corporate group to be able to allow them to spend the money that they would have had to spend investing and 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 thats where the efficiency.
He is really coming from and that's on the back half of the year.
Like we said.
Got it and then.
Can you just I think you've kind of alluded to this but just coming for a little clarification of how you're thinking about and what you're seeing 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.
Yes.
The competitive market.
It is still five serve if I ask Jack Henry on the retail small business products and then.
Hi, bottom on some fun Astra fund technology out there on the corporate side of the business.
There is some there's some I don't recall newer players with players that are retail focus that we run into we're still in the tier ones.
Yes, we're got to win in the 50% or greater tier two still around that range tier three the win rates a little lower the volumes were higher but we're still doing very well competitively you can see that in the numbers in the growth in the retention. So you.
Feel good about the win rates, where we are in our competitive differentiation is the products we continues to grow.
That's great thanks very much.
At this time I will turn the call over to the presenters.
So we ran out of time with everybody. There's a couple of questions that are laugh will 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.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.