Good morning. My name is Angel. I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings third quarter 2019 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question, please just press star one on your telephone keypad. I would now like to turn the call over to Steve Calk, Director of Investor Relations. Sir, please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us for our third quarter 2019 conference call. With me on the call today is Matt Flake, our CEO, Jennifer Harris, our CFO, and Carl Ryden, EVP and General Manager of PrecisionLender. 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 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 SEC yesterday afternoon. Now let me turn the call over to Matt.
Thanks, Steve. On today's call, I will share our results and key business highlights from the third quarter 2019 before handing the call over to Jennifer for a detailed look at our financials and updated guidance. In the third quarter, we generated revenue of $79.7 million, up 32% year-over-year and up 3% sequentially. We also added close to 500,000 registered users in the quarter, which brings us to approximately 14.1 million registered users and represents a year-over-year increase of 14%. I'd like to begin by discussing some highlights from across the business, starting with our sales performance during the quarter, then share a few updates on our acquisition of PrecisionLender. On the sales side, we had another quarter of well-balanced performance across the business.
The digital banking teams added a number of new clients from both the credit union and bank markets in the quarter, highlighted by the addition of a top five credit union. We've talked a lot about our corporate product suite as a way for us to land and expand with new clients. Corporate was the key driver of this deal, leading the way for a number of additional Q2 products, including Q2 SMART, our data-driven marketing and analytics tool. While we have traditionally positioned Q2 SMART as a retail-focused solution, we are beginning to include it in additional business use cases. For this Tier 1 credit union, it will allow them to aggregate their business customers into segments based on common traits.
For example, customers that use third-party merchant services and then target those customers with specialized marketing messages that promote the credit union's own services or other commercial offerings. I should note we've been pleased with the continued adoption of Q2 SMART in general. In the third quarter, Q2 SMART was a component of every net new deal signed by our platform team. Helping financial institutions harness the valuable data across their technology assets and take action on that data remains an important component of our strategy. We've been enabling that strategy for years with products like risk and fraud analytics and Q2 SMART, and the data capabilities of PrecisionLender will enhance our offerings even further in this category. On the cross-sell side, we achieved a record bookings quarter powered in large part by our corporate banking suite and our Centrix products.
As we continue to expand our product portfolio with solutions like Cloud Lending, Gro, and PrecisionLender, we expect our cross-sell opportunities to expand as well. Our cross-sell team's performance during the quarter is noteworthy nevertheless, especially considering that they achieved a record bookings even if we exclude the incremental benefit of the Gro and Cloud Lending deals. Moving to Cloud Lending, it's been approximately a year since we closed the acquisition, and while there's still work to do to fully integrate their products, we've been pleased with the team's sales and delivery performance to date. Their biggest win during the quarter was with one of the world's top 20 financial services providers headquartered in the U.S. This is the largest deal in Cloud Lending's history. The customer noted that they selected Cloud Lending to replace a homegrown small business lending platform.
This legacy homegrown solution was incapable of integrating with Salesforce, the client's CRM platform, and required at times up to 12 months to roll out product changes, limiting the client's ability to attract new business. With Cloud Lending's native cloud infrastructure built on top of Salesforce, the client will be able to roll out a modern lending and borrowing platform in a matter of months. While this was their biggest Cloud Lending deal during the quarter, the team also won a broad variety of leasing and lending deals in multiple geographies. I'm especially encouraged by Cloud Lending's performance when you consider it in the context of our continued expansion into commercial banking. Over the last several years, we've built a next-generation corporate banking offering that has become a key strength of our digital banking platform.
When you layer in the ability to digitize the lending and borrowing process of Cloud Lending with the newly added pricing and digital coaching capabilities of PrecisionLender, I believe our full suite of commercial banking solutions is truly unique in the marketplace. Switching gears to Q2 Open. In early October, Credit Karma, a consumer technology platform with more than 100 million members, announced the launch of Credit Karma Savings, a free high-yield savings account. The savings account is powered by our Q2 Open technology and partners with one of our community banks, which provides the necessary FDIC insurance and regulatory infrastructure. The flexibility of the Q2 Open technology when compared to legacy back-office core processors designed for brick-and-mortar banking is a perfect match for a digital-first, technology-savvy company like Credit Karma, particularly as the financial marketplace continues to evolve.
When you couple that with the regulatory expertise and relative agility of a community bank partner, we believe our banking-as-a-service model is differentiated in this emerging market, and we view relationships like Credit Karma as validation of that belief. While it's very early days for the Credit Karma savings product, you can see why we're excited about the growth potential of Q2 Open deals with blue-chip fintech companies. These companies have a proven ability to rapidly grow their customer base by providing great digital experiences and solving unique customer challenges. We are hopeful that these clients will bring the same ingenuity to bear when building and deploying their products over time. We're extremely excited to partner with a leading consumer brand in a way that will benefit them, a community financial institution, and ultimately, their customers.
Now let's discuss our acquisition of PrecisionLender, which we announced and closed in October. PrecisionLender is a leading enterprise SaaS provider of data-driven sales enablement, pricing, and portfolio management solutions. With the addition of PrecisionLender, we believe Q2's position as a leader in digital transformation for financial services globally is substantially strengthened. I'd like to quickly share the strategic rationale behind this investment. First, PrecisionLender is a cloud-native SaaS provider. They are committed to delivering what progressive banks need for the future, a modern, cloud-based SaaS application for making smarter, more profitable loans. With an impressive time to value for customers, their systems can be up and running in as quickly as 90 days after signing. Next, we believe PrecisionLender improves Q2's position in the commercial lending value chain, one of the most critical areas of revenue for our customers.
The combination of the innovative solutions of PrecisionLender with Cloud Lending and our organic corporate banking solutions will expand and deepen our offerings and position within commercial banking. We believe this will open up new opportunities and support our existing commercial banking customers with critical sales enablement, pricing, and portfolio management capabilities. I continue to see firsthand that data analytics talent and innovation are critical across financial services. With the addition of PrecisionLender, we're adding a great deal of new and valuable data, as well as key talent and technology to strengthen our existing portfolio of solutions. From a business perspective, we believe PrecisionLender has a large addressable market that will be accretive to Q2's TAM, adding an estimated $2 billion.
Finally, the relatively short time to value and the SaaS infrastructure of PrecisionLender's solutions create an attractive growth profile that we believe can be accretive to our financials. I'm excited about the PrecisionLender team and how they complement Q2. Our combined company will have nearly 1,500 incredibly talented and passionate employees. With PrecisionLender adding roughly 150 team members, the team operates primarily out of Cary and Charlotte, North Carolina. These attractive markets are key to future expansion efforts for Q2 overall and will continue to diversify our talent pool. In addition to these domestic offices, PrecisionLender has talent in offices around the globe. Today, PrecisionLender's solutions are currently helping roughly 150 banks price over $1.7 trillion in loans annually, and that number has been growing.
Because their solutions can help commercial bankers build stronger relationships with key commercial customers, banks using PrecisionLender have seen an average of approximately 8% higher deposit growth and approximately 9% growth in commercial loans, according to FDIC data from December 2017 to December 2018. These are key measurements of growth for any commercial bank. In addition, as of the second quarter of 2019, there were approximately 13,000 commercial bankers and operators using PrecisionLender solutions. We believe this combination of incredibly talented people, complementary solutions, and expanded data will enable us to deliver and design increasingly more innovative and valuable solutions. I'd like to spend a moment unpacking just how this acquisition augments our market opportunity. We have deliberately focused on a land-and-expand go-to-market strategy.
We have strong relationships with our customers, they rely on us for innovative new solutions, and in particular, new solutions that drive their revenue growth. Today, both PrecisionLender and Q2 have a presence in the community and regional bank and credit union space, we believe the Tier 1 and Tier 2 space is a natural place for Q2 to drive adoption of PrecisionLender solutions to our current customer base and vice versa. In the regional bank space, PrecisionLender and Q2 are also represented. We believe when combined with our corporate banking solution, the Cloud Lending and PrecisionLender solution set is well-positioned to create substantial incremental inroads. Finally, when we think about global enterprise banks, a large market that we have not traditionally approached with the Q2 platform, we believe both Cloud Lending and PrecisionLender are well-positioned for success.
On the subject of PrecisionLender's market opportunity, we've had the ability to further explore their pipeline and watch them close some of their existing opportunities since announcing the deal. We're excited about their sales prospects, particularly in the enterprise bank space. It can take years to build deals with these global enterprise financial institutions, and we believe they've laid the significant groundwork for success in this market. In the third quarter, for example, they signed two enterprise deals with large Tier 1 clients, one a West Coast bank with just under $100 billion in assets, the other a roughly $20 billion bank in the Midwest. While we're excited at the opportunity that PrecisionLender represents, I also want to point out that we believe it's critical to continue investing in this business in order to capitalize on that opportunity.
Before handing the call over to Jennifer, I'd just like to reiterate how pleased we are to join forces with PrecisionLender. In the last several weeks, I've spoken with many of their employees and customers and have been inspired by their talent, technology, and passion. When we started this company 15 years ago, we set out to be the leader in digital transformation for the financial services industry. By combining our teams and technologies with PrecisionLender's, we believe we'll be well-positioned to continue that mission. Thanks. With that, I'll turn the call over to Jennifer.
Thanks, Matt. I'll begin by reviewing our results for the third quarter before finishing with updated guidance for the fourth quarter and full year 2019. Total revenue for the third quarter was $79.7 million, an increase of 32% year-over-year and 3% sequentially. The sequential revenue increase was driven primarily by an increase in subscription and services revenue related to the Q2 platform business as a result of organic user growth on our digital banking platform and new customer go lives during the quarter. In addition, revenue from the businesses we acquired at the end of 2018 contributed to both the sequential and year-over-year growth. Transaction revenue represented 15% of total revenue for the quarter, down from 16% in the previous quarter and 17% in the prior year period as a result of the continued slowing growth in bill pay transactions.
As we turn to gross margin and operating expenses, let me remind you that unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis. Gross margin was 53.6%, up from 52.8% in the previous quarter and down from 53.8% in the prior year. The sequential improvement is attributable to growth in subscription revenue and expanding revenue contribution from the businesses acquired in 2018. The slight year-over-year decrease is primarily attributable to the lower than normal margins on the acquired businesses due to the impact of purchase accounting adjustments. Total operating expenses were $40.1 million, down 2% from the previous quarter and up 37% from the prior year.
The year-over-year increase in total operating expenses is largely attributable to headcount additions to support continued growth in the core business, as well as additions associated with businesses acquired at the end of 2018, and the investments we have made to integrate the back office systems and shared services of these global businesses. The sequential decline was concentrated in sales and marketing related to the timing of our annual client conference, which was held in May 2019. Adjusted EBITDA was $5.6 million compared to $3.2 million in the prior quarter, and $5.7 million in the prior year. The sequential increase is attributable to the increase in revenue and resulting increase in gross profit, combined with the decline in operating expenses previously discussed.
The year-over-year decline is largely a result of the acquisitions closed during Q4 of last year and the resulting investments we have made to capitalize on the growth opportunity that those businesses present. We ended the quarter with cash equivalents, and investments of $636.9 million, up from $617.7 million at the end of the second quarter. Note that this was prior to the expenditure of approximately $510 million in cash to close the PrecisionLender transaction on October 31st. Cash flow from operations for the third quarter was $17.4 million, up from negative $7.8 million in the second quarter, resulting in free cash flow of $15.7 million for the quarter.
The sequential improvement is attributable to the timing of payments and deposits received from customers in the period and the resulting increase in deferred revenue and decrease in accounts receivable, combined with an increase in accrued compensation, given the timing of our biweekly payroll and our annual bonus payments. Along with the increase in deferred revenue, we also had an increase in backlog, ending the quarter with $954 million in committed backlog. This represents a sequential increase of approximately $37 million, driven by the continued bookings performance across the business, combined with strong renewal performance during the quarter. Before I turn to our updated guidance, let me briefly share some historical financial information for PrecisionLender. We have just begun preparation of standalone unaudited interim financials for PrecisionLender, which we expect to have completed in early January.
We currently estimate that for the nine months ended September 30, 2019, PrecisionLender generated approximately $16.5 million of revenue and yielded gross margins of over 70%. We estimate that adjusted EBITDA for the same period was approximately negative $11.5 million, and we estimate that they ended the quarter with approximately $21 million in deferred revenue, which we expect will receive a significant haircut in our purchase accounting. Given the materiality of this purchase adjustment, going forward, we plan to provide non-GAAP revenue information in order to more accurately reflect the true financial impact of acquisitions. We expect to have the interim review completed and file our amended Form 8-K, including the standalone financials for PrecisionLender, along with our combined pro forma financials for the year ended December 31, 2018, and the nine months ended September 30, 2019 in early January.
Looking ahead, we believe that PrecisionLender will contribute 2020 gross revenues prior to purchase accounting adjustments in the mid $30 million range, an increase for PrecisionLender of more than 50% year-over-year. We estimate that PrecisionLender will generate adjusted EBITDA in millions within the range of negative mid to high teens for 2020. These are preliminary estimates that we will update along with formal 2020 guidance on our fourth quarter call in February. Given the size and timing of the transaction, we wanted to provide our stockholders with a general sense of our current expectations. Let me now turn to our updated fourth quarter and full year 2019 guidance. We forecast fourth quarter revenue for the core business, excluding the impact of the acquisition of PrecisionLender, of $84.4 million-$86.4 million, which would represent year-over-year growth of 26%-29%.
We anticipate PrecisionLender will add approximately $3.5 million-$4 million in revenue to the fourth quarter prior to any related purchase accounting adjustments, bringing the growth or non-GAAP revenue guide for the quarter to $87.9 million-$90.4 million on a combined company basis. This would represent year-over-year growth of 31%-35% prior to any related purchase accounting adjustments. For clarity, our full year revenue guidance, excluding PrecisionLender, remains unchanged at $313 million-$315 million, or year-over-year growth of 30%-31%. We are increasing our full year non-GAAP revenue guidance to a range of $316.5 million-$319 million, or year-over-year growth of 31%-32% inclusive of PrecisionLender and prior to any related purchase accounting adjustments.
I'd like to point out that when we provided revenue guidance for the full year of 2019 on our last earnings call, there were two open considerations. First, we had estimated the level of buyouts we would see in the back half of the year and Q4 in particular. Since then, we have seen far fewer buyouts than we have seen historically. While this negatively impacts our reported revenue for the back half of 2019, we believe that reducing churn can benefit the business over time. The second consideration was the impact of holidays and client resource availability during that time on the Q4 projected go lives. As we have told you in the past, it is not unusual for clients who do not get live prior to Thanksgiving to push past the holidays and into the new year.
While we are focused on continuing to push these projects across the finish line, there is a possibility that they slip into early 2020, and therefore, we feel it is more prudent to be conservative and leave our full year revenue guidance prior to the impact of PrecisionLender unchanged. We are forecasting fourth quarter adjusted EBITDA in the range of $11 million-$13 million, excluding PrecisionLender, and $7.7 million-$10.5 million, including PrecisionLender. For clarity, full year adjusted guidance, excluding PrecisionLender, remains unchanged at $20 million-$22 million, and our full year adjusted EBITDA guidance decreases to $16.7 million-$19.5 million with the addition of PrecisionLender. As previously mentioned, we continue to deliberately invest into the business to manage the implementation backlog and capitalize on the continued booking success of both the core business as well as the acquired businesses.
As we look to integrate PrecisionLender, we will be mindful of the existing momentum PrecisionLender has already built and look to invest in their future success as we have for past acquisitions. In closing, we posted a strong quarter showing sequential improvement in both gross margins and adjusted EBITDA, and we generated positive free cash flow in the quarter. We continue to see strong bookings momentum and continued execution in operations as we integrate and innovate our existing businesses. Now, let me turn the call back over to Matt for his closing remarks.
Thanks, Jennifer. In closing, we are very pleased with the quarter and believe it reflects the benefits of the significant investments that have been made in the business. We continue to see solid sales execution, including signing several Tier 1 organizations across our digital banking suite and Cloud Lending platforms. I was excited by Credit Karma's recent announcement of their savings account product, which is being launched in partnership with our Q2 Open's Banking-as-a-Service group. Finally, with the closing of the PrecisionLender acquisition, we are enthusiastic about the impact we believe they can have on our business. Even a week after formally closing the deal, we've already seen them executing against their well-developed pipeline.
We believe their products and talent will strengthen our own for years to come, and perhaps most importantly, equip our clients with modern technology that can help them issue smarter loans and create stronger client relationships. We will certainly continue to update you on our integration of PrecisionLender over the quarters to come. For now, I'd like to once again welcome their passionate employees and dedicated customers to the Q2 team. Thanks again for joining us today. With that, I'll hand it over to the operator for questions.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please limit your questions to one. Stand by while we compile the Q&A roster. Your first question comes from the line of Sterling Auty. Please go ahead.
Yeah, thanks. Hi, guys. On the PrecisionLender side, I guess there's two points that I'd like to better understand. Number one, who is the point person inside the organization that really makes the decision and is the connection with the customer? Second, as you look at the investment, Jennifer, thank you for the commentary around 2020. Is it fair to take the EBITDA run rate that you talked about in terms of the historical versus the mid to high teens negative comment for 2020, and look at that as your area of investment in the business? What are those investments? Is it additional R&D? Is it all sales and marketing? Where do those investments actually go?
Hey, thanks, Sterling. I'll have Jennifer answer that one second. Since we're joined here by Carl, I'll have him walk through the point person and then a little bit on the sales process for PrecisionLender. Carl?
Yeah. The point person varies from bank to bank, mostly by size. At the large bank, at a global bank, it'll be the largest person in charge of growth and profitability of the commercial book of business and the commercial portfolio. It might be someone leading wholesale transformation, someone leading commercial lending transformation or commercial lending sales effectiveness overall or sales strategy. At the smaller bank, it's typically bought by the C-level folks, the Chief Lending Officer, Chief Credit Officer, Chief Financial Officer, and ultimately the CEO of the bank will make the decision to do it because it affects how they go to market and how they address their customers.
On the investment, Sterling, if you look at the historical nine months plus the guide for the two months, then estimate the month of October that won't be included in those numbers, 2019 adjusted EBITDA for PrecisionLender is roughly $-15 million, is what we anticipate for the full year. I would expect it to be relatively flat in absolute dollars. However, we are still going through the final 2020 planning process, so wanted the guide that we're putting out there right now to have a little bit more flexibility, thus the mid to high negative teens. Where the investment is going, PrecisionLender is still an early-stage company and has been heavily focused on development of the product. The majority of those 150 employees that we acquired were really more on the development compliance side.
They were just getting to the point where they were starting to build out their infrastructure. We do think there's going to be some investment in both sales and marketing to capitalize on the pipeline that they've built, as well as G&A-type infrastructure.
Thank you.
Thanks, Sterling.
Our next question comes from the line of Terry Tillman with SunTrust Robinson. Please go ahead.
Hey, good morning. Can you hear me okay?
Yeah, we've got you.
Okay, I'm going to be savvy here. We can only ask one question. I have a three-part one question. It's on PrecisionLender. We've done a bunch of work. We're getting a lot of questions and there's curiosity about it. What I'm curious about is you've mentioned a couple of Tier 1 wins, Matt, I think in October. What I'm curious about, and maybe Carl could chime in terms of where PrecisionLender is in terms of sales activity with Tier 1, just kind of what inning. The second part is, these Tier 1 wins, do they start small, or can they be seven-figure type ACV transactions? The third part is the 50% growth next year. Is there anything contemplated there, your size and reach driving revenue synergies from the Q2 side? Thank you.
Yeah. Thanks, Terry. Carl, do you want to go through the Tier 1 question? Terry, just for clarification purposes, Q2 uses the platform businesses, use Tier 1 as kind of $50 billion between $5 billion. I think when you're referring to Tier 1, you're referring to the enterprise accounts, which are the top 100 in the world.
Yeah. We probably need to get our language aligned a little better. At PrecisionLender, we talk about community, mid-tier, and regional, which is below 50 billion. Then we talk about enterprise, which is above 50 billion in assets. For us, in terms of where we are on the pipeline on a lot of the enterprises, we have an active pipeline and a lot of activity. Those typically go down by we win a single line of business or a single geography, and then expand throughout the bank, either part of a larger rollout or you kind of sell one, then sell the other, and move on through there. We're quite far, I would say. Where are we in terms of the innings with those?
I think it's hard to say.
From a penetration perspective, it's early. Obviously, you can look at the website. You got Bank of America and some of those big ones out there's a lot of room for Precision to go add plenty of deals. When we talk about the pipeline, I feel really good. If you think about the third quarter, they signed about a $20 billion financial institution, a $100 billion financial institution. We're working deals that are similar and larger and smaller in size to those. Feel really good about where we are with the pipe, and we're trying to execute in the fourth quarter and also continue to build it for 2020 synergies on the end.
I'd just throw in, I think Carl Ryden touched on it, but the enterprise deals in the greater than 50 billion in assets area are very similar in size to a large Tier 2 or Tier 1 digital banking deal. I would caution you that like a Tier 1 digital banking deal, as Carl Ryden mentioned, they may originally enter into one line of business or one geography, and then expand over time to other lines of business or other geographies in a phased rollout, much like our Tier 1 clients choose phased rollout. They may not be a seven-figure ACV from the very beginning, but they certainly will typically grow to that. On the 50% growth, that's our early estimates of a combination of just the PrecisionLender organic growth, as well as some impact from cross-sells into our base.
Remember that we had already signed a partnership with PrecisionLender in May of this year, so we have some traction there, but it's still early.
Yeah, I would just say anecdotally, Carl and I were talking yesterday, and one of the things that we just heard from one of the sales reps at PrecisionLender was they've already received five leads from some folks over on the Q2 platform side of the business, and one of those leads has a contract in front of them. We're seeing good cross-pollination between those two organizations.
All right. Thank you.
Thanks, Terry.
Our next question comes from the line of Tom Roderick with Stifel. Please go ahead.
Hi. Thanks, and good morning. I guess Terry took the three good questions on PrecisionLender. I'll ask you a one part, one question here on Cloud Lending. Matt, curious if you've had any more thoughts about the international opportunity as you look at Cloud Lending, and then as you layer in the PrecisionLender part of the story, how does that sort of add to the international opportunity? Thanks.
Yeah. Thanks, Tom. We're continuing to invest in the specific geos that we're in, Europe and ANZ. Very targeted in those areas, and there's been good momentum in both of those geographies. I actually went over to Europe and met with both teams in October. There's a lot of synergies between the two of them, but they're also very focused on executing on their pipelines. We'll bring those teams together in both Europe and Australia. The opportunities, I think there's going to be a lot of synergies between the pipe and the relationships and how we can begin to have conversations with the Cloud Lending customer on the Precision side and vice versa. I feel very good about where each team is in the geography and that there's not really any overlap.
We get a lot of leverage out of each one of the teams. The talent of the team is very diverse. They have different types of relationships. I think Carl and I both agree that the opportunity and the timing and the overlap is very nice for us, and we think it's going to continue to generate more wins in the regions.
Excellent.
Thanks, Tom.
Thank you, guys. Nice job.
Thanks, Tom.
Our next question comes from the line of Peter Heckmann with Davidson. Please go ahead.
Hey, good morning. Thanks for taking my question. Can you talk a little bit more about how the financial institutions that are not customers of PrecisionLender, how they may be treating this solution? Do they have a homegrown pricing tool? Who would be the competitors in this space? Kind of a linked question is, it appeared from the website that PrecisionLender had a strong historical relationship with nCino, and I'm curious about how that might evolve post-acquisition.
Yeah. Carl, why don't you take those?
Yes. The first question, in terms of customers who aren't PrecisionLender competitors, our number one thing we displace even, and it may surprise you, but even at large banks is a massive Excel spreadsheet. At small banks, typically at a large bank, it's a massive Excel spreadsheet that's been connected to some kind of database. At one of the top banks in the world that we're pretty deep in the process with, they currently have an Excel sheet connected to an Access database that they use to manage the pricing at a bank, and this is a top 20 bank in the world. Those things are disconnected from all the other systems.
As they roll out a Cloud Lending or any other digital transformation projects, Salesforce, Dynamics, nCino, any of these things, stuck in the middle of that entire process is an Excel spreadsheet that's cobbled together that doesn't connect to anything. Being able to connect that end to end is really powerful. At the small banks, you end up with a lot of times, the wet finger in the wind, they do nothing. They just kind of match the competition or hope they match the competition. A lot of times we're selling effectiveness at the small end, we're selling efficiency and effectiveness at the high end. That works really well, particularly as part of the digital transformation journey and connecting into the larger value chain of commercial lending. On the relationship with nCino, we've had a long relationship with nCino.
We're installed alongside of them at a lot of banks. We connect really tightly into Salesforce on the CRM side, to Dynamics. We've maintained a position at PrecisionLender of being kind of Switzerland, being neutral in all this. Ultimately, where that comes from is the desire, we're going to solve for our customers. We're going to make the Q2 solutions really great. We're going to have a great experience for Cloud Lending and PrecisionLender. We have a great experience for nCino and PrecisionLender. We have a great experience with Salesforce and Dynamics. Ultimately, this gives us more surface area to kind of become connected with those customers and add value, and prove that we can add value and continue to grow those relationships.
I'm 100% supportive of that as well. Thanks for the questions, Peter.
Thanks.
Your next question comes from the line of Matt Hedberg with RBC Capital Markets. Please go ahead.
Hey, it's Dan Bergstrom for Matt Hedberg. Thanks for taking our question. Say, Matt, 2019's been a really good year for the company, a transformative year, if you will. Expanded TAM capabilities, model evolution, really great traction all around. Nice M&A deal here recently. If you think about your total capabilities now looking into 2020 versus rewinding a year ago at this point looking into 2019, what gets you most excited here?
Yeah, that's a great question, Dan. I think, if you look at the quarter that we just put up, it really highlights, I think, where the opportunity is going. You start with one of the largest credit unions in North America signs a corporate banking deal with us. We think that's going to lead, hopefully, to a retail opportunity. We had a record company-wide cross-sell in the third quarter, which is traditionally a slower quarter. A lot of that's build up from the client conference that happened a little later in the year. Cloud Lending signed a top 20 financial institution in the world for a small business lending product. Creates a lot of opportunity for us.
Q2 Open, we were able to put some color behind a blue-chip fintech like Credit Karma that's rolling out a savings account, and there's a lot of positive things happening on that side of the business. PrecisionLender does a $20 billion and $100 billion bank, and we're out talking to a lot more than that in the quarter. It really sets us up for a nice 2020 to be able to offer a solution for both sides of the balance sheet, whether somebody's looking at digital banking, onboarding capabilities with our Gro products. Our corporate banking product is doing really well. We continue to see continued momentum there. We've added value in the commercial banking lending value chain with Cloud and PrecisionLender. Excited about the Q2 Open stuff.
Hopefully it's not lost on people, this is nine straight quarters of signing a Tier 1. As I always say, our focus is on signing financial institutions that want to be competitive. When you're signing nine Tier 1s, three last quarter and one this quarter, it's a barometer for how your products are doing competitively in the market because everybody shows up to those deals. We're doing very well competitively. The platform continues to evolve. We're really focused on integration and customer experience in 2020. I think it lays out not only for a great 2020, but for the next couple of years, we have a nice little run ahead of us, as long as we can continue to execute and focus on customers and employees.
Thank you.
Yeah. Thanks, Dan.
Thanks, Dan.
Your next question comes from the line of Joseph Vafi with Canaccord. Please go ahead.
Hey, guys. Good morning. I thought we'd just circle back to the core business here. We've been talking about PrecisionLender and maybe talk about the pipeline in the core digital banking business here. I know Q4 is usually a strong seasonal quarter for you. Some color there would be helpful.
I think, I feel good about the Tier 2, Tier 3, and Tier 1 pipelines for Q4. There's a lot of work to be done before the end of the year. There's a lot of these things naturally pushed to the holidays, we've got to make sure we're focused on driving these deals to a conclusion. I feel really good about that. I'm paying attention to how much cross-selling we had in the third quarter and making sure that we didn't empty all of our barrels, I feel like we've got a good cross-sell opportunity out there. Some of that's the depth of the product offerings that we have. We continue to see success on the corporate side of the business, the retail banking piece. We talked about Q2 SMART, the success we're seeing there.
The Centrix products are just steady eddy consistently every quarter. People want to use those products. Just really focused on closing them. I think we're going to have another solid quarter. From a bookings perspective, you can look at the backlog. It's gone up significantly. Also remember, Q4 is always a big quarter for us on renewals and extensions. We're putting a lot of energy into that, taking customers and extending them out, and providing more visibility into our revenue numbers. I feel really good about the core business for Q4. Just got to continue to focus on execution.
Great. Thanks a lot.
Thanks, Joseph.
Your next question comes from the line of Brad Berning with Craig-Hallum. Please go ahead.
Good morning, team. I just want to follow up on that conversation just a little bit further. If you could go into talking about, kind of the growth rate of more of the pipeline versus the bookings, especially given that Banking-as-a-Service usually doesn't get into the bookings number, given how the accounting works. Maybe you can kind of go through each of the core areas and what you're seeing as far as trends in the pipeline from Digital Cloud, Banking-as-a-Service, and PrecisionLender.
Yeah. Thanks, Brad. I would kind of reiterate the comments I just made, which is, as we see the blue chips, fintechs that are beginning to materialize. They go sign up, and they get in the sandbox. They start working with Q2 Open. They put a lot of energy into the marketing of these new products, and then they launch them. To your point, those bookings aren't always captured in the backlog when we do these deals. I think you're going to continue to see Q2 Open punch above its weight class on the platform side of the business. The exciting part is, I think this year we've signed three or four Cloud Lending deals with existing platform customers, and so we're really starting to catch our speed on those and cross-sell those deals.
Plus, the Cloud Lending opportunities continue to pop up, not only in North America, but as I mentioned earlier, in Europe and in Australia, and those teams are executing very well. The PrecisionLender side, keep in mind, I'm very new to this, but I have been, whether it was meetings that I had in Europe or meetings that I've had here or working with the sales team, I continue to be impressed by the process that they use, the sophistication for a company of this size. They're well ahead of where we were in the $20 million range on how we looked at deals, forecasted them. I feel very confident that they're going to execute on this pipeline that's in front of them.
It's our job to put all this together in a consistent story, which we're working hard on global branding and messaging so that we can make sure it's clear to prospects and customers exactly what all of this technology does for them and their transformation. The pipeline numbers, the win rates, all those things continue to improve as we add more products and deliver those. I think that's somewhat representative of you don't cross-sell a lot of products if you're not executing. It's just coming together nicely, but I don't want to get ahead of ourself. We have to execute, and we'll hopefully have some good news to share with you on the February call.
Exciting stuff. Thanks, guys.
Thanks, Brad.
Thank you.
Our next question comes from the line of Brian Peterson with Raymond James. Please go ahead.
Hi, thanks for taking the question. If I turn back the clock to the Analyst Day earlier this year, you gave some margin targets for 2020. Clearly, that didn't incorporate PrecisionLender. I'm curious, given the cross-sell strength you've seen, is there any change towards the investment philosophy in the rest of the business and how we should be thinking about margins next year? Thanks, guys.
No, I think you're going to continue to see investments across the business, not just in Cloud Lending and PrecisionLender to capitalize on those opportunities, but the core business as well to continue to advance the corporate product, the integration with these new acquisitions, et cetera. I think the core business, I still believe, was trending very nicely towards kind of where The Street had us next year, which was roughly 10% of where The Street has the revenue. That's kind of what we talked about at our Analyst Day. I think, if you factor in the negative mid to high teens with the PrecisionLender brings, that's bringing you down to where in absolute dollars, year-over-year will be relatively flat on adjusted EBITDA.
I still feel like that the core business, absent the PrecisionLender acquisition, was tracking to kind of where The Street had us.
Thanks, Brian.
Thank you.
Our next question comes from the line of Brett Huff with Stephens. Please go ahead.
Yeah. Hey, guys. This is Joel Heffler on for Brett. Thank you for taking my question. I wanted to get your thoughts on your innovation lead versus competition and building out your complete platform. How do you guys stay ahead of the curve and grow your lead? Thank you.
Yeah. Thanks, Joel. I think anchoring off of Carl's comments earlier about trying to solve the problems for our customers is where we start. We literally had 25 customers in October that were C-level executives with the financial institutions. It's an event where we try to get from them where they want to go, the problems they're trying to solve, and then we share where our roadmaps are, and we align with those. As you know, if you look at our financial statements, we put about 18%-19% of our revenue into R&D. There's a real commitment to delivering on those. I think we have aligned our product and dev teams to where they are working in a more focused way on solving specific problems.
It's really a commitment to listening to the customers and trying to take the problems that they're trying to solve and using our technology as a way to do it in partnership. We found that when we go into a room and think we're the smartest people, that it usually means we got to reiterate over and over, and so just partnering with our customers to solve their problems, but also paying attention to what's going on, what's Facebook and Amazon, and what's happening on the outside of the world that they may not be aware of, and sharing those and collaborating on those problems. We got to help our customers compete with whoever they're competing with in their markets. We got to think about things that they may not be thinking about.
Then you have to operationalize software to make sure it's allowing them to become more efficient in how they run their business. That's how we take a view on R&D, but it's collaborative, and there's a lot of energy and effort that goes into it. I think we've proven over the last 15 years that our ability to continue to innovate is we're highly differentiated, and I think you see that in the marketplace, whether it's the Tier-1 wins or the revenue growth or the success we have on some of the clients that we reference.
Great. Thank you.
Thanks, Joel.
Your next question comes from the line of Bob Napoli with William Blair. Please go ahead.
For the question. Just one more on PrecisionLender and then maybe a little color around the BaaS business, if you could. What do you expect the long-term metrics to be for PrecisionLender gross margins? What is the growth rate? Obviously, very high growth rate now. Can it stay at 30%-plus growth rates over the next three to five years? How is management tied in? Because it was an all-cash deal, how can we be confident that the management that I think you've suggested is very critical to this business is committed for the long term?
I'll take the first part of that, and then I'll let Matt comment on the management piece of it. As we told you in my prepared remarks, the nine months ended September 30, 2019, PrecisionLender posted just north of 70% gross margins. There is going to be some investment as we invest in infrastructure and systems and processes to install these enterprise clients that they're bringing on. I think you'll see gross margins here in 2020 dip down below 70%, but I think they'll still be accretive to the overall company gross margins. I think you'll see them returning to 70%+ in 2021 forward. I think the three-to-five-year timeframe on growth, I certainly think that we're still seeing 50%+ growth in 2020 and 2021.
Give us some time to bring together their long-term model and our long-term model before I comment on a period out farther past that. I certainly expect 50% growth still in 2021 from them.
Yeah, Bob. On the retention piece, I think one of the things that we talked about was, yeah, it was $510 million all cash. The mission alignment is, I think, what means the most to the leadership team and the people at Precision. They were highly focused on accomplishing something. They had a lot of options in this process that they went through, and they selected Q2. Economic was obviously you had to be there, but I think where we wanted to go and where they wanted to go aligned. I would just start by saying that us helping them accomplish their mission of helping financial institutions be more competitive and continue to exist is a big driver for the leadership team, whether it's Carl or Ken or the rest of the folks over there.
We also to ensure that we had them, we put together competitive packages with equity and the vest over a period of time, and from a cash compensation, they're aligned with what people should make, if not a little bit more than that. They're highly incented to be successful through compensation. Ultimately, I think what matters to this group of people is, are they able to accomplish what they set out to accomplish and have a good time doing it and enjoying the people that they work with? I think we're in alignment there, and we're going to continue to focus on their ability to fulfill that mission, and it aligns with ours, so it's a win-win for us.
Great. Thank you.
Your next question comes from the line of Mayank Tandon with Needham & Company. Please go ahead.
Thank you. Good morning. Matt, thanks for the commentary on Q2 Open. Could you just talk maybe broadly about the opportunity on the BaaS side for you? Congrats on the Credit Karma relationship. Just in that light, how big is the opportunity? When does that start to really show up in terms of the growth contribution? How do you monetize this vis-a-vis against your core digital banking platform?
Yeah. I'll have Jennifer talk about how it layers in. The opportunity for us, it continues to evolve. It's dynamic. We feel like we are well out in front of people on partnering with fintechs. We're talking with some brands, but our model of partnering a fintech with a community financial institution to where they can begin to develop against our Core Processing platform in the cloud within two weeks and begin to drive whatever user experience they want. There's subscription revenue that comes from the accounts, but there's also participation in interchange and float, which is unique, and it helps the community banks or credit unions, and it helps the fintechs as well drive more revenue through their business model. We think we have a unique and highly differentiated business model in that space. It's evolving, as I've said.
We continue to work our way into what I consider to be the premier fintech names in the marketplace. They've shown scale, they have customers, and they have a real marketing strategy and good funding. We're very targeted there. We believe moving into brands is an opportunity. We were recently at the Money20/20 conference, and there were significant conversations with many of the top 50 financial institutions in the world about how they can use our platform as well. There's a lot of opportunity. There's a lot of execution ahead of us. We're bringing in a different type of customer than a community bank or a credit union, but we're also helping community financial institutions by partnering them with these fintechs so that they can participate in some of the gains as well. Jennifer, you want to comment on the profile?
Yeah. On Credit Karma's deal, just given the size and number of account holders that Credit Karma has, I would expect that their high-yield savings product utilizing our CoreP ro platform, is going to start out similar in size to one of our Tier 2 bank deals. Not all fintechs are that large with that big of an account base, but we certainly believe that Credit Karma is going to be very typical in size to one of our Tier 2 bank deals.
That's great to hear. Thanks.
Your next question comes from the line of James Faucette with Morgan Stanley. Please go ahead.
Hey, guys. This is Jonathan on for James. Thanks for taking my question. Given the PrecisionLender acquisition, is there anything that needs to change in terms of your go-to-market strategy and sales force as it relates to integration? Can you remind us of the cross-sell opportunities there, not only as it relates to current Q2 customers interested in PrecisionLender, but also PrecisionLender customers looking at Q2 offerings? Thanks.
Yeah. Thanks, Jonathan. The go-to market, I think one of the things when we looked at putting the company together was PrecisionLender really has a strong enterprise or what we call the top 100 banks in the world, sales team that's out there. We didn't have people in that spot, we'll continue to leverage that organization that they have and how they're talking to those folks. PrecisionLender and Q2 struck a partnership in May of this year because of our distribution network in the 50 billion and below space, and our sales organization as well as our relationship management organization to be able to cross-sell those products. We're going to continue to have the PrecisionLender enterprise team, as well as their community and regional team that sells in partnership with our sales organization. It fits very nicely.
Cloud Lending, there's a little bit of overlap there as well. In general, PrecisionLender had not fully built out their sales organization, and that was one of the reasons why it was so logical to partner up with Q2. From a cross-sell opportunity within PrecisionLender customers, I think on the community and regional side, the Q2 platform, whether it's corporate banking or the small business stuff, will be a nice fit to add technology that's on the non-credit side, income on the non-credit side of the business for many of our partners. PrecisionLender has such a great name with these customers that it's a trusted provider. It's vendor consolidation. It helps them quite a bit. PrecisionLender will help us on the community and regional side.
On the enterprise side of the business, I think whether it's Cloud Lending or Q2 Open, which may be one degree of separation from the buyer, but there's a relationship in there that we can get to. I think you'll see PrecisionLender, in the long run, ultimately drag some of these products in to go cross-sell. I think that's a longer-term deal for us to be able to have, whether it's cloud or Q2 Open in these opportunities in 2020 through PrecisionLender because they're getting them turned on, they're signing the deals. That is definitely a place that we look at, in the long end, it's going to be an opportunity for us. Thanks, Jonathan. We've just got a couple of minutes, I wanted to get this last question in.
For your final question, comes from the line of Andrew Schmidt with Citi. Please go ahead.
Yeah. Hey, Matt, Jennifer, Carl. Thanks for having me on. Really appreciate it.
Thank you.
On the corporate banking side, you guys have clearly had a lot of traction there since you relaunched the product in 2017, I believe. Could you talk about why you're winning deals and maybe the profile of the banks that you're winning? If you could dig a little bit more into the linkages between PrecisionLender and the corporate banking product, that would be helpful.
Yeah. Let me talk about the corporate banking product standalone, and then I'll have Carl talk about how he views some of the synergies on the corporate banking partners with PrecisionLender. Just to clarify, we began doing commercial banking with the very first release of our digital banking platform in 2004 and 2005. The platform initially started out with ACH wires and tax payments. In 2011 and 2012, we decided to begin to go deeper into that functionality with broader payment types, information reporting, entitlements engine. We made a large push to begin investing in what next generation corporate banking will look like. That was really part of the IPO for us. The funding was to go to really put some wood behind the arrow on that.
As we've been developing the product over the last six, seven years, it takes a long time to build these, but the differentiator for us has been that our clients are showing technology on mobile phones and tablets, the ability to do wires, tax payments, authorizations. The CFO can be on a golf course and approve a wire from his mobile phone. That is what corporates are looking for as the younger generations begin to be controllers and VPs of finance and CFOs. Our technology is highly differentiated from a user experience perspective. It's modern, but it also drives deep functionality. As we've said over time, a lot of the legacy players have been building corporate banking products for 30 years, and there's deep functionality there that it's going to take us a while to replace.
We've been methodical in signing a deal, identifying what those features are that we've got to go replace, and building them one at a time. That's where you're seeing our success, whether it's a $20 billion bank or a $1 billion financial institution, we're driving that, or one of the top five credit unions in the U.S. There's been a lot of work and a lot of time. It takes a lot of time to build these functionalities. It takes deep partnerships with customers to solve those problems, and we continue to invest in that heavily. It's a huge opportunity for us. With that, I'm going to hand it over to Carl Ryden to talk how you view the PrecisionLender opportunity with Q2's corporate banking suite.
Yeah. I'll go quickly on this because we're at the end. We named the product PrecisionLender, but it really is about relationship banking in total, and it has to be for the economics of banks. Most of the capital in the denominator of the return equation comes from the capital on the credit side. The majority of the numerator for a profitable relationship at a commercial bank comes from non-credit revenue. Almost two-thirds or better of that numerator will come from non-credit revenue. To drive non-credit revenue, you have to have a tool that helps you price and structure complete relationships, both loans, deposits, other fee-based business, such as corporate treasury and those sorts of businesses as well. You also have to have good products and delivery with great user experiences. That's where Q2's corporate stuff comes in.
I think we're seeing a lot of synergy, even in some things in the pipeline where folks are buying the Q2 corporate product for building their product set and delivery capabilities, then they're using PrecisionLender to coach their sales team and their bankers to be able to sell that and be able to drive business there. One other piece that layers into this is the data. The data being able, in PrecisionLender, we like to say, for a customer like this with a deal like this and a relationship like this at a bank like this and an industry like this, here's the things we need to coach that RM to talk to that customer about the types of business that they would buy, the types of business that they would value.
Being able to look at the data from the Q2 corporate side and blend it with what we see on the opportunity side and the portfolio side in PrecisionLender allows us to better coach those bankers in the sales process on driving that cross-sell revenue that doesn't carry with it the capital that really drives the returns at the bank.
Thanks, Carl, and thanks, everybody, for your time today on the call. We're glad we were able to get all the questions in, and we look forward to seeing you out on the road in the coming weeks. We're going to be at quite a few shows, so get with our investor relations. Thanks, everybody, and welcome PrecisionLender to the Q2 family. Have a good day.