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Good morning. My name is Marcella, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Q2 Holdings Third Quarter 2020 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Josh Yankovich, Investor Relations. Sir, you may begin.
Thank you, operator. Good morning, everyone, and thank you for joining us for the third quarter 2020 conference call. With me on the call today is Matt Flake, our CEO; and Jennifer Harris, our CFO.
This call contains forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of Q2 Holdings. Actual results may differ materially from those contemplated by these forward-looking statements, and we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct.
Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our periodic reports filed with the SEC, included in our most recent quarterly report on Form 10-Q 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.
Let me now turn the call over to Matt.
Thanks, Josh, and thanks, everyone, for joining the call today. Today, I plan to provide a recap of our third quarter performance, followed by an update on our outlook for the fourth quarter and beyond.
In the third quarter, we generated non-GAAP revenue of $104.8 million, up 31% year-over-year. We also added approximately 800,000 users in the quarter, bringing us to 17.1 million total registered users, a 21% increase year-over-year.
Overall, I was pleased with the performance of the business in the third quarter. We continue to see a large number of users added to the platform through a combination of new customer installs and sustained organic user growth. As I've stated on previous calls, our delivery team has been performing at an extremely high level in this remote environment. This theme continued in the third quarter, where we had a record number of new digital banking customers go live on the platform.
On the sales side, performance in the quarter was consistent with the themes we discussed on our last earnings call. Net new activity was slower than normal, as financial institutions continue dealing with the many distractions brought on by COVID. Nevertheless, our net new sales team turned in a solid performance that included some banner wins. Also, our cross-sale and renewal teams had another strong quarter, which helped offset some of the slowdown on the net new side. And finally, I believe that our overall financial performance for the quarter serves as a great reminder of the underlying strength of our business model.
Despite the unprecedented times in which we find ourselves, we continue to sustain high levels of revenue growth, while steadily improving the profitability of the business. And as such, I was optimistic about our performance in 2021 and beyond.
Now I'd like to provide a bit more detail on our sales execution from the quarter, along with an update on what we're expecting moving forward. On the digital banking side, the team performed in line with our expectations. One of the highlights from the quarter was a top-10 global financial institution signing a contract for our CardSwap product, which helps financial institutions get their cards to top of wallet for subscription services. Rolling CardSwap out with the customer of this size certainly helps validate the demand for this product and generate momentum for us. That will also help us drive continued improvement to the functionality and user experience of the solution, which will benefit all of our customers.
Our lending teams had a strong overall quarter, including a North American Tier 1 financial institution that selected Q2 for a loan pricing solution. And this solution will help their commercial lenders analyze their pricing mechanisms and decisions. This is a particularly exciting win because it demonstrates the value of the pricing data we have curated. And we're already engaged with the customer to potentially expand the relationship.
It's worth noting that in Europe, one of the regions where we sell our lending solutions, I believe it's taken even longer to adapt to the current environment, particularly given that many European countries have reentered more serious lockdowns in recent months. So while decision-making was slower than we anticipated in this region in the third quarter, our pipeline suggests an uptick in new deals in 2021. As a reminder, international revenues are a nonmaterial portion of our total revenue, but we do believe Europe represents a strategic growth opportunity for us over the long term.
Our banking-as-a-service team also had a solid quarter, including one particular noteworthy deal, in which one of the largest U.S. fintechs selected our cloud-based core as their system of choice to support a new digital-only bank initiative. As is often the case with Q2 BaaS wins, this is exciting because we believe there's significant long-term opportunity to grow with this partner, as they work to drive adoption. We hope to be able to share more about this partnership in the future, as this customer nears their public launch.
Next, cross-sales and renewal activity within our existing base was strong yet again, which helped to mitigate some of the slowdown we've seen in the net new market. The cross-sell activity is happening within both our banking and lending customer bases.
In the digital banking arena, our Centrix risk management product line has been a substantial contributor, accounting for nearly 1/3 of the total cross-sell bookings in the quarter. And on the lending side, we had 2 significant renewals with global banks, which we view as an endorsement of the strategic value of our lending solutions with even some of the world's largest financial institutions.
In general, I'm incredibly proud of the way that we weathered the storm as a team. The quarter played out largely as we expected. And in spite of this, we were still able to exceed our COVID-adjusted bookings expectations. As we head into the fourth quarter in 2021, our expectation today, based on feedback from customers and our sales teams, is that we should see improvements in the predictability of purchasing decisions and the corresponding steady increase in bookings over the quarters ahead. And because we believe many of the deals we've been working have simply pushed out into the future, rather than being canceled all together, I'm optimistic about the state of our pipeline across our lines of business.
Since our inception, we've considered Land and Expand, a key component of our growth strategy. And I believe our cross-sale performance indicates that the strategy is alive and well and has played a vital role for our business in recent quarters. Given the considerable evolution of our product suite, I expect expansion to play an even more critical role in our sales success going forward. We believe the breadth of our product portfolio today, with onboarding, lending and digital banking from retail to corporate, all with modern, open, data-first technology, is unique in the market. It equips us to approach multiple lines of business within a financial institution, giving us a large surface area to land new customers wherever they are in their digital transformation. And as we continue to integrate our major solution set, we believe the value proposition for our customers to start with one product and expand over time becomes even more compelling, as we share data across these systems to create better experiences for account holders and drive efficiencies and more informed decision-making for our customers.
We started to see this type of expansion gain momentum in recent quarters, as our sales teams became more familiar with products across the portfolio. And we are continuing to properly align our sales efforts, so that we can continue driving this trend. So in the quarters to come, we expect to see this cross-pollination continue to be a driver of our bookings performance.
The breadth of our portfolio also creates substantial runway to develop new, highly-differentiated innovation, as we integrate key aspects of our product suites. We're able to deliver compelling and cohesive features and functionality that due to the often siloed nature of legacy technologies, differentiate our products from those in the market today. We had one such example in the quarter, what we're calling our treasury onboarding solution.
In general, the comprehensive onboarding of customers remains a major opportunity for digitization, particularly on the commercial side, where onboarding a new client requires greater documentation. Today, many commercial financial institutions rely on a combination of paper-based processes and legacy technologies that they must string together to onboard a new commercial client, a process that within some customers can take as much as 30 days. This is a suboptimal experience for many new commercial clients.
By connecting key components of our commercial digital banking offering with elements of our account opening and lending solutions, our teams develop an end-to-end commercial enrollment tool to materially improve this critical process. Treasury onboarding helps digitize both the back-end and customer-facing processes of onboarding a commercial client, which can substantially reduce onboarding time and, in turn, increases the productivity of commercial banking staff. Solutions like this that can replace multiple technologies and manual processes and have a quantifiable impact on time to revenue for customers, are possible through the integration of our cloud-based data-first technologies on both the deposit and lending side of our customers' businesses. And we believe these types of products can create quick expansion opportunities.
For example, shortly after launching treasury onboarding, one of our largest digital banking customers, a top-50 North American bank chose our treasury onboarding solution and is in the midst of implementing it, as we speak. We've talked about the strength of our corporate banking offerings in recent years, and combined with our commercial lending capabilities, treasury onboarding gives us yet another vector to land with key commercially focused financial institutions.
And finally, helping customers harness and make decisions using data remains a core component of our product philosophy. We believe the data we collect from pricing, more than $2.5 trillion in commercial lending data and transactional banking data behind nearly 2.5 billion log in through the first 9 months of the year alone, creates a lasting competitive advantage for Q2. And we have a proven track record of turning that data into tangible innovation, whether it's on the digital banking side, with marketing and security tools, or in lending, where our commercial lending data helps lenders make more informed and more profitable loans. So we believe data will continue to be a driver for expansion activity and another differentiator in net new deals.
Now as I conclude my prepared remarks on our third quarter performance, I wanted to briefly address a piece of news we disclosed in a press release issued yesterday afternoon. Jennifer Harris, our Chief Financial Officer, is planning to retire in the first half of 2021, with David Mehok joining Q2 as our new CFO.
I'll let her share more information. But for now, I want to thank Jennifer for her unparalleled contributions to Q2, our customers, our employees and our shareholders over the past 8 years. You will never find someone, who is hard-working and of higher integrity than Jennifer. And Q2 would not be the company it is today without her. She's been a great partner and an even better friend, and I will miss her dearly. I know she's doing what she needs to do to spend time with our family and enjoy a well-deserved retirement.
So Jennifer, thank you so much, and I'll hand the call over to you.
Thanks, Matt. We are pleased to have delivered third quarter results that exceeded the high end of our guidance for both non-GAAP revenue and adjusted EBITDA. I will begin by reviewing our results for the third quarter, before finishing with updated guidance for the fourth quarter and full year 2020.
Total non-GAAP revenue for the third quarter was $104.8 million, an increase of 31% year-over-year and up 6% from the previous quarter. Both the year-over-year and sequential increases in revenue were largely attributable to new customer go-lives.
As Matt mentioned, we continued to add a strong number of digital banking users to the platform through a combination of organic growth and a record number of new customer go-lives during the quarter. While we did see several implementation projects slip during the first and second quarters, many of those projects were completed during the third quarter, and the slippage that we saw during the third quarter was minimal.
Given that we have had strong delivery execution with respect to the deals signed in 2019, we have already installed more new digital banking customers to the platform during the first 9 months of this year than we did in the entire year of 2019. As a result, we expect to end the year with both strong year-over-year growth in registered users as well as the number of customers live on our digital banking platform.
The year-over-year revenue increase also benefited from the revenue contribution of PrecisionLender, which we acquired in the fourth quarter of 2019. Transaction revenue represented 14% of total revenue for the quarter, down from 15% in the prior year period and consistent with the previous quarter. Transaction revenue continues to grow in absolute dollars, while remaining relatively consistent as a percentage of total revenue.
The year-over-year decrease that we have experienced in bill payment activity has been partially offset by the growth in transactional revenue from our Banking-as-a-Service offering. And the slight decline year-over-year as a percentage of total revenue is primarily attributable to the increased subscription revenue contribution from PrecisionLender.
As expected, our sales activity in the quarter was characterized by a significant mix shift towards our existing client base. We observed another quarter of strong renewal performance, adding more than double the amount of renewal bookings as compared to the same period in the prior year. We also had better-than-anticipated cross-sell bookings, as we continue to expand the number of solutions we provide to our clients across our various lines of business. In fact, the dollar amount of bookings added from existing clients during the first 9 months of the year exceeded the amount added from the existing clients for the full year of 2019.
Turning to backlog. Given the depressed new customer bookings during the quarter as a result of the COVID pandemic, we were pleased to still post a sequential increase of 2% over the previous quarter, increasing our backlog as of quarter end by approximately $21 million and ending the quarter with a total committed backlog of over $1.2 billion, a 30% increase as compared to September 30, 2019.
The addition of PrecisionLender's backlog contributed to roughly 4% of the year-over-year increase. Gross margin was 52.5%, down from 53.6% in the third quarter of 2019 and from 53.9% in the previous quarter. The year-over-year decline in gross margin is attributable to the increase in costs associated with the underlying data center infrastructure of our digital banking platform, in addition to the incremental delivery headcount and the increase in employee-related costs that were associated with the large number of customer installations and users onboarded during the quarter.
As a reminder, last quarter, we indicated that we did not expect to see any meaningful impact to our financial results from the success-based fees related to PPP-funded applications in future periods, and that drove a large portion of the sequential decline in gross margin, along with the incremental delivery headcount and related costs previously mentioned.
Total operating expenses were $50 million, up 25% from the prior year period and up 4% from the previous quarter. The year-over-year increase was primarily related to the additional expenses associated with PrecisionLender. Excluding the expenses associated with PrecisionLender, operating expenses would have been up approximately 8% year-over-year, with that increase being a result of additional headcount concentrated within R&D.
The sequential increase was driven primarily by headcount additions and the related increase in employee benefit costs as well as payroll taxes associated with equity award vestings and exercises in the quarter. We also incurred a onetime cancellation fee of approximately $900,000 in the quarter, as we proactively canceled all in-person aspects of our contemplated spring 2021 client conference.
Adjusted EBITDA was $8.1 million, up from $5.6 million for the third quarter of 2019 and consistent with adjusted EBITDA of $8.1 million in the previous quarter. Our third quarter adjusted EBITDA results outperformed our expectations due in large part to the overachievement in revenue as previously described. And the year-over-year improvement is also attributable to a decline in spending associated with travel and marketing-related events, as a result of COVID and the related travel and social distancing restriction.
We ended the quarter with cash, cash equivalents and investments of $396.1 million, up from $388.9 million at the end of the second quarter. Cash flow from operations for the third quarter was $5.2 million, and we generated free cash flow of $3.2 million for the quarter.
Now let me turn to our updated guidance. We are forecasting fourth quarter non-GAAP revenue in the range of $105 million to $107 million, and we are revising full year revenue guidance to the range of $402.5 million to $404.5 million, representing a 27% year-over-year growth. Our updated guidance reflects the increasing revenue contribution generated from our existing customer base through organic user growth as well as the implementation of cross-sold products, which carry a quicker time to revenue compared to that of net new installation. Our updated guidance also takes into consideration the timeliness of larger projects scheduled to go live in the fourth quarter.
As we have discussed in the past, projects that do not go live prior to Thanksgiving are susceptible to being delayed to the following year, as our customers work through the holiday season. We forecast fourth quarter adjusted EBITDA of $4.9 million to $6.9 million, maintaining our full year guidance of $21 million to $23 million, resulting in adjusted EBITDA margins for the full year of approximately 5% to 6%.
In summary, we delivered better-than-anticipated results in the third quarter due to the successful delivery of new clients and the continued renewal and expansion of our existing customer relationships. We have adapted to a fully remote environment, adding historic levels of new clients and users to the platform. We observed the benefits of having a diverse set of solutions to provide to our existing customer base, as they have become increasingly reliant on us to help them navigate through the uncertain environment and position themselves to accelerate their digital transformation efforts. We've continued to manage variable spend and incremental cost, which has highlighted our ability to allow revenue overachievement to drop to the bottom line, and we will continue to ensure that we are in a position to manage the return spend once the net new buying environment returns to more normal levels.
On a personal note, given this is my last earnings call as CFO of Q2, I'd like to publicly thank all of our employees for their commitment to supporting our customers in their digital transformation initiatives and the innovation that Q2 has delivered. It has been an honor and a privilege to stand alongside Matt representing this company over the last 8 years. And I will remain with the company through next March, working closely with David and his team to ensure a smooth transition.
Finally, I'd like to thank you, the shareholders of Q2, for the amazing support you have provided this company. It has truly been an honor and a pleasure to serve as your Q2 CFO. And I look forward to serving my family in the Chief Family Officer role, spending the next 1.5 years with my twins for their senior year of high school, helping them navigate college applications, life decisions and moves away from home.
Now let me turn the call back over to Matt for his closing remarks.
Thanks, Jennifer. We will miss you. But keep in mind, we still have you until April. So for now, let's get back to work. And while there's only one Jennifer Harris, I know that our employees, customers and shareholders will all be excited to work with David Mehok.
We found David through an exhaustive search. He's a great experienced leader and in addition to our team, and we'll look forward to getting him properly introduced in the coming weeks.
Now before I hand the call over to the operator, I'll conclude with a quick update on customer sentiment and our business outlook for the quarters ahead.
Over the past 8 months or so, we've been fortunate to spend a lot of time with our customers. In general, what we're hearing is that financial institutions are in a much stronger position than most would have predicted in March. The swift action of the government, the stress testing that became a requirement as a result of the 2008 crisis and the digital investment many have made over the past several years have helped our target financial institutions remain solvent and mitigate fallout related to COVID. And while the last few quarters have understandably slowed some financial institutions' decision-making, I continue to hear that digital transformation is no longer a choice, it's an imperative. As such, we anticipate gradual improvement in a net new buying environment into the fourth quarter and 2021.
Finally, over the long term, I believe our mission-driven culture, our strong track record of delivery and customer success and the breadth of our innovative product portfolio put us in a highly differentiated position to grow with financial institutions, all finance and fintech companies across the globe. Thanks.
And with that, I'll turn the call over to the operator for questions.
[Operator Instructions] Your first question comes from Sterling Auty from JPMorgan.
Let me start with Jennifer, congratulations on the 8-year tenure. And thank you for your consistent transparency, your levelheadedness and financial leadership of the company, and enjoy a wonderful retirement. The college application process is more nerve racking than earnings, so good luck with that.
Thank you, Sterling. I appreciate the kind words.
And then onto the business. So for my one question. Matt, if we hit the rewind button and go to this exact call in November of 2016 and think about the comments that you made post the election at that point, how would you kind of compare and contrast, granted, we don't have certainty on what the outcome is going to be, both with the President and Congress. But with what we do know, can you kind of layer that on to the sentiment that you just gave about the coming quarters? And just kind of characterize what you feel the impact on buying patterns might look like?
Yes, Sterling. So without getting into too much of the politics of it, I mean, 2016 was probably a little more shocking than what we saw here. And it was a -- what I call it, it was -- there were probably greater concerns around the inevitability of some of the changes in treasury and the rules that were going to come down. And I think that in this environment, just the clarity around -- well, we don't have any clarity, but what we think is going to happen, it just -- it's really been over the last 30 days, I would say, showing that the engagement levels have just -- have really begun to pick up over the next couple of quarters. And so the timing of these decisions is really what is going to be interesting.
And I think just the fact that the election is over, and hopefully, in the next week or so, we'll have more clarity on what the House Senate and the executive branch are going to look like. But I would say that just having it past us is going to be a tailwind for us, and we still have the macro uncertainties around COVID and these other things, which are very different than what we had in '16.
But everything is trending in a better direction from the pipeline perspective, which is really what I think you're getting at. And I don't know that we're going to pull a bunch in at the end of the year, I feel much better about the fourth quarter than I did about the third quarter, but I feel much better about the first half of '21 than I did in the middle of the third quarter. It's just -- there's just so much more engagement right now over the last 30 days. And we're seeing people trying to get some decisions done, and that's across the board in North America, at least, as far as the lending side of the business, the BaaS side of the business and the platform side of the business.
Tom Roderick from Stifel.
Jennifer, I'll start with you as well. Huge congratulations on your retirement. It's been a heck of a run, and I think I speak for a lot of us that have been 7 months, 8 months now in quarantine. A desire to spend more time with your family, speaks to a great family. So congratulations on that. And I hope you enjoy a little bit of downtime with your future.
Thanks, Tom.
So Jennifer, I'm going to start with -- I'm not imagining that you're in a huge rush to give us a whole lot of guidance on '21 when you're handing the reins off to a new CFO. But it is a reminder that the timing of some of these new deals and implementations that get booked impact the way they sort of flow through to the revenue, particularly with implementations.
So with respect to some of your comments and Matt's comments on what you saw in the third quarter and the pace of the pipeline for the fourth quarter. And also as you lap PrecisionLender, can you just give us a sense as to how we ought to be thinking about the mid-term or secular growth rate of the company as we clear through Q4 here and go -- move into next year? And then some comments around the impact of what was booked here, and what you think can get booked in the fourth quarter. How that flows into the 2021 revenue numbers? Just high level qualitative would be really, really helpful directionally.
Sure, Tom. Obviously, as you mentioned, next year's revenue growth rate depends on a number of factors. And one of those being how long we see the depressed buying environments. How quickly things come back and we begin to execute and close new deals in the next 60 days, post election as well as the first half of 2021 and then the mix of those deals.
Our actual growth rate will also be dependent on the bookings mix between net new and cross as well as our cloud-based business, as you mentioned, that are faster to revenue. So based on all those factors, I do agree, it's a bit premature to provide '21 guidance. But based on what I know today and the visibility that I have into the existing pipeline and what I think is going to happen over the next 60 to 90 days, I certainly wouldn't expect our year-over-year growth rate next year to be any lower than 20% at this point. And how much above 20% it can go, really depends on the mix of the deals signed in the next 60 to 90 days as well as the first half of 2021.
To the extent it continues to remain around the digital products that are cloud-based and faster to revenue or cross-sales, then we can expand that revenue growth rate. But to the extent we see some of the Tier 1 banks and credit unions on the digital banking side, or the large enterprise customers on the digital lending side, be a bigger part of that mix. Those are slower to revenue, as you know, and so those wouldn't impact until the very end of 2021 and going into 2022. So I hope that helps a bit.
That's hugely helpful. That's great. And then, Matt, quick follow-on, just with respect to -- I think the tone of what you're seeing for business, last quarter was very obvious. You had some huge Tier 1 wins. You were very clear that you didn't expect that in the third quarter given seasonality and the nature of who typically buys in the third quarter.
But one thing that jumped out to me from your comments was this thought or theme perhaps that the installed base seems to be leaning in a little bit, but that winning net new has been a little slower. We've seen that from a lot of software companies, given the nature of selling remotely. Can you just talk a little bit more about that? Are you seeing a pipeline of net new opportunities that have been slow to develop, but you're building that pipeline? Or are banks just not as eager to switch core systems at a time where it's been all hands-on deck for the last 7, 8 months?
Yes. And I think one of the things that's been interesting, Tom, is that just over the last probably 60 or 90 days, we've had several opportunities that started off as digital banking, just evaluations. And then we're beginning to talk about this road map to digital transformation, which moves not just your digital banking system, but how do you begin to transform your onboarding, how do you begin to transform your lending process -- your digital onboarding and lending process, how are you connecting the 2 of those to use data.
And so to some extent, we are elongating the sales process. But in the long run, we're going to get much better deals, much longer deals, more integration -- more deeper relationship with the customers.
But ultimately, it's really about their -- banks are really focused on several things right now, credit risk, known and unknown, cross-selling for noninterest income and then also trying to drive more profit through the interest income. There's a little bit of a holding pattern around, when is the stimulus? Or is the stimulus going to come out? And do they need to be prepared for more government lending, whether it's PPP or Main Street? And then they're saddled with this remote work environment, which puts pressure on the digital transformation side. And then there's some things around LIBOR to SOFR, which is the benchmark rate stuff that it's a little distracting to them. So they have a lot of stuff on their plate right now that makes it difficult to really sit down and focus on these opportunities. But I have been pleased with the amount of engagement we have and the deals we have.
And I do -- I painted a picture of going to be a tough Q3. But I do want to point out that we signed treasury onboarding, which is a product that our Cloud Lending group built to a top-50 bank, that's an existing customer. We had a Tier 1 PrecisionLender win. We signed a top-10 global bank on our CardSwap product, which is a big win. We signed one of the largest fintechs to a new core processing deal. We had 2 PrecisionLender -- 2 of PrecisionLender's biggest customers sign extensions. And then we had a really big competitive win on the West Coast for a big Tier 2 credit union, which had everybody in the brother competing on.
So it wasn't a terrible quarter for us considering all the environment, but cross is really what's carrying the day for us, along with the BaaS business and some of the lending stuff. But digital banking net new deals, they've just slowed down. And I anticipate them picking back up over the next 2 quarters, maybe 3 quarters. But the cross piece of it is really a function of our product suite and the breadth of the products that we've built and how it's tied together and how we can walk into a customer and talk about we can transform your digital onboarding process and help with your lending process and use data to connect to 2 of those.
So really part of this is the assets that we've assembled, but also the innovation that we're putting into those assets to drive a lot of the conversations. And we've been very fortunate in some of the assets that we've acquired and built because our timing has been very good.
Brian Peterson from Raymond James.
And Jennifer, congratulations, it's been one heck of a run. We will miss working with you. But congratulations, Chief Family Officer is one heck of a title.
But Matt just kind of -- I appreciate all the color on the demand environment. I realized that you've built out the portfolio, you've got a lot of customer exposure here. I'd be curious as we stand today, what do you think kind of comes back first from a bookings perspective? And is there anything that really gets you excited, as we think about the pipeline over the next few quarters?
Well, I mean, I think, Brian, if you think about what I just walked through, the thing -- the main thing we need to come back is the digital banking decision-making. And that's what we're starting to see more activity on. The Banking-as-a-Service business, really hadn't missed a beat. PrecisionLender, I think, is going to come back sooner rather than later. And then the lending side of the business, Cloud Lending stuff continues to innovate and roll out, whether it's treasury onboarding, PPP. Those are the things that are -- in North America is going to come back.
EMEA is just -- it's a sit-and-wait game right now with the lockdown that's going on over in Europe. And Asia has some pretty interesting opportunities. I don't -- I think those are probably '21, but there's some pretty interesting opportunities in Asia for us on the PrecisionLender and Cloud Lending side of the business. But the digital banking net new deals were really the slowdown, as we talked about in Q3, but I see momentum picking up there. The sales team is doing a great job of generating opportunities. And I think you're going to see a pickup late this year in the first couple of quarters next year.
Okay. That's good to hear. And just maybe thinking to like, I guess, on the call, is really an emphasis on selling into the customer base. Can you help us kind of think through how the puts and takes of that would look on RPO? I think that's a metric we're all focused on. But understanding if there's expansion? And how does that relate to contract terms? Just any moving parts on how to think about the selling back in the installed base? And what they could do to RPO over the next several quarters?
Sure. I mean, as we continue to cross-sell into the existing customer base, it obviously increases the backlog because they're signing up for committed minimums or fees based on asset size of the bank for those new modules or cross-sells that they're taking. So it definitely increases the backlog. And then the timing of how it will roll out is dependent on the remaining contract term of the existing underlying contract. Because when we do those cross-sells, we make them coterminous with the existing master agreement.
Got it.
Now sometimes, as we've said previously, any time we go in and try to do a cross-sell, the relationship management team is also trying to extend the customers' contract. So sometimes it not only increases backlog by the amount of the net new cross-sell module or product, but also the incremental overall TCV of new term.
Terry from Truist Securities.
I guess, Jennifer, you're still a named executive. So if you still want to take the time and have fun with our questions, our multipart questions, we could do calls next year if you want to, so you just kind of think about that.
But my multipart question here just relates to, first, on treasury onboarding. It does seem like really kind of perfect timing in terms of trying to improve or reduce the friction there and make that more digital.
So I'm curious, Matt, are those deals, could they be large relative to the rest of the products? And are you replacing a homegrown tool? Or is it more kind of a prior package tool? So that's the first part.
And then, Jennifer, I was hoping you could talk a little bit about how you're thinking about churn kind of near-term versus maybe what you typically expect in that 5% range?
Yes, Terry. So treasury onboarding is -- it's a large cross-sell for us as we begin selling it. And I think your point is accurate, which is the timeliness of it is critical. And just to simplify what treasury onboarding does is, one of the toughest things that a bank has to do is convince the business to convert to their -- need to move to their new systems. And nobody will [Audio Gap] now it's a manual process. When they go out to the commercial customer to gather the information, the customer has to fill out the application. Then that information comes back, and the back office at the bank has to manually enter that. What we've done is automated that process and made it a fraction of the time to do that, and it's integrated into the digital banking system.
So to be clear, the Cloud Lending development team built this product and it's integrated into our digital banking platform. And so it's a very unique experience. It's early, and we're beginning to figure out the easiest way to install it and roll it out. But the fact that we're doing it with such a big bank right now and really cutting our teeth and getting it ready to go, it's an exciting opportunity for us. And the timeliness of it is, to your point, it couldn't be better right now to make it easier for a bank to onboard a new customer.
And Jennifer, you want to take the churn?
Yes. On churn, Terry, as we mentioned earlier in the year, as we started to see the impacts of COVID, we felt like we might be susceptible to some customer concessions or increases in churn, based on the economic impacts that our customers were experiencing, particularly being mindful of the fintech and all FI customers, particularly within the BaaS and the digital lending or leasing businesses, who are reliant maybe on additional funding to sustain their operations.
And then as we discussed last quarter, during the second quarter, we ran the Q2 CARES program, where we gave folks near-term discounts on invoices and return for extensions of term. And so when you take all of those things into account, I do expect that our churn is going to tick up slightly this year. So I think it will be a little bit above the 5% that what we've seen historically. However, I would say that our core digital banking churn will still be under 5% for the full year. The rest of that churn will come from those other lines of business, as we've talked about.
And remember also, we mentioned last -- or last quarter with Q2 CARES that will have some headwinds going into 2021 on churn because those were 1 year contracts, unless we're in getting those customers to convert to other Q2 products, the expiration of the PPP and loan forgiveness contracts will increase churn a bit next year. But I wouldn't expect it to be significantly different than what we'll see this year. And maybe on a more positive note from a revenue retention perspective, I mentioned early in the year that we expected it to be similar to what we've been in the last couple of years, about 120%.
And given the continued execution that we've seen from our cross-sale team, I think that we will, in this year, seeing trailing 12-month revenue retention at about 120%.
And congrats, Jennifer.
Andrew Schmidt from Citi.
And Jennifer, let me add my congratulations on your retirement.
Thank you.
Quick question on the BaaS business. I was wondering if you could talk about how the pipeline has developed since you rebranded that business and since the dissolution of the StoneCastle partnership? It was good to see the fintech win. I look forward to hearing more about that. But just more details following, I think, more freedom from a go-to-market perspective. Any comments around the pipeline would be helpful.
Yes. I mean, I think we're seeing -- as I mentioned earlier, the BaaS business really didn't miss a beat. The fintechs are out there really aggressively trying to push product out. We've talked about Credit Karma and Acorns. But we're seeing more engagement in the Tier 1s. And there's more use cases for us to go find whether it's debit cards, credit cards. The CardSwap product becomes interesting for us. So that business has been steady eddy for us, and we continue to see the pipe grow. And keep in mind, we always talk about all bookings are not the same. And those bookings are a little harder to predict, but there's way more upside in them than the bookings on the platform side, because somebody signs up and they roll out a card program. And then it takes time to get that done. But we can't capture that in a booking. So I feel really good about the BaaS business.
The StoneCastle stuff, it wasn't -- it was more about us looking at the future. They weren't really holding us back as much as it's just giving us more freedom, and we're seeing some of those opportunities come to fruition, the economics are going to get better for us in the long run. So that was -- as we said, that was an amicable split. Both of us are pleased with it, and we're really excited about the opportunities going to come with us moving forward.
Got it. That makes sense. And just a follow up on just a product question. On bill pay, it seems like there's a significant opportunity to just help the banks do bill pay, the legacy bill pay is dated. It seems like there's a lot of new solutions out there can reduce friction. Wondering whether that might be on the road map at some point. I know you have some third-party partnerships, and you also have Biller Direct, which you rolled out a few years ago. But just curious if that's strategic imperative for you?
Yes. I mean, I think if you think about the bill pay business, it's kind of a drag on our growth, but it's a big part of the digital banking experience, but what you're seeing is a reduction in the number of payments each individual makes. And some of that's because of the gig economy that's happening.
And if you look at the CardSwap product that we rolled out with the top-5, 10 bank in the world, what we're able to do is it's effectively making it either for the financial institution or the fintech to issue new cards, to keep it top of the wallet. It makes the switching cost less for them and less likely, because it automates the process in which you can get a new card and then update your subscriptions with you, whether it's Apple, Spotify, Hulu, Netflix. It takes revenues up for the -- transactional revenues up for the financial institution.
And so bill pay is changing. Our Biller Direct product continues to gain some momentum, but it's really about how do you solve the payment problems for the customers based on the new world that they're in. Because if you think about your -- you used to have a home phone bill and Internet bill and then your cell phone bill, those are -- your cable bill, those will be consolidated into 1 or 2 bills now.
And so what we're trying to do is to match the payment processing with the way that the users -- with who the users are actually paying. So I don't see us getting into the actual settlement of the payments, or putting the checks in the mail to pay people, but we are doing things with technology to make it better for the financial institution to roll the end user to pay their bills.
Peter Heckmann from D.A. Davis.
It's gotten a little bit muddled with the increase in the breadth of your solution set. But when you think about kind of average revenue per consumer digital banking user, where do you -- where are you now? Where do you think you can go, based on adding additional functionality and continued adoption of mobile, other functionality? How big can that number get?
Yes. So we used to talk about the number of SKUs that we had. And as we were revamping for all the acquisitions that we've done, we felt like instead of talking about the number of SKUs, it would be more appropriate to kind of describe our current product penetration, as it relates to the 28 different product groupings that we disclosed in our Form 10-K.
And today, on average, if you look at that, just in the digital banking customer space, so not excluding the hundreds of PrecisionLender and Cloud Lending customers that are not on the Q2 banking platform, but those on the digital banking customer base have purchased approximately 25% of those solutions, with some of our customers actually being as high as 50% penetration. So we still have a lot of opportunity for expansion within all of our digital banking customers. And if they were hypothetically to take all of the solutions that we have, that are applicable to their institution, it would roughly double our current subscription revenue, just again in our digital banking customer base. And then we have ample opportunity to expand and take our digital banking platform into those customers who are Centrix-only or PrecisionLender or Cloud Lending-only customers, and that would grow it even more.
Got it. Got it. And which of those SKUs would you say that you're most excited about over the next 2 years? Whether that something represents a proprietary technology for Q2? Or just is kind of the right solution at the right time in terms of gaining penetration?
Yes, Pete, I mean, this is probably a little bit of recency bias, but treasury onboarding certainly is exciting for us as we do that. But if you look at -- on the call, we talked about 1/3 of the cross-sell was the Centrix products. Those products with fraud and the other things that are going on, I think we stopped $175 million worth of fraud this year with that product for our customers. So obviously, that's a big cross-sell for us.
The corporate banking product is still a huge cross-sell for us to go, penetrate a lot of the base. We're seeing a lot of credit unions, who are wanting to do corporate banking offerings, and most of those don't have those solutions right now. The CardSwap product, obviously, I think one of the things you'll see with this is, we'll roll it out with the top 10-bank in the world. It will become a user experience. I hope maybe they do an advertisement on it. Maybe people just begin to see it that, that always tends to drive more cross-sell opportunity.
So we have a lot of different technology to go cross-sell the whole -- a lot of the data initiatives that we have, whether it's on the PrecisionLender side for market insights to help people understand what loan should be priced and what's the right pricing for those. There's a lot of opportunity for us on the cross-sell side, which is a great place for us to be in.
Tim Willi from Wells Fargo.
Congratulations, Jennifer. A lot of people, I'm sure, wish they could do what you're getting ready to do here and enjoy some time with the family. So I wish you well.
Thank you.
A quick question. 2 things. One is on pricing. I guess I'm just sort of curious if you see any changes around the pricing environments for any of the product sets that I guess you would feel are critical to the pipeline and to revenue, in general? Or whether it should have been pretty stable? Any thoughts you might have there about what you're seeing?
I would say that on our side of the business, some -- in certain circumstances, we see some customers that need a little bit of help. But in general, as long as we're driving innovation, more products, new looks and feels and all those different things, pricing -- we're not seeing a lot of pricing erosion.
I will tell you that on the competitive side of the business, on takeaways, we saw some discounting from some providers in the space and point solution providers that were very aggressive in the third quarter that we weren't willing to chase. We'll take the long route on that. But we're holding our ground on pricing right now and then just trying to be disciplined with it in this environment.
Great. And then second question, just around margins. First, I just want to make sure I understand. So the gross margin in 3Q from 2Q was the absence of PPP, which I think you had all talked about last quarter. So not a surprise there.
But then really, just probably largely a function of the elevated installation activity as opposed to anything around product mix are set. Is that the right way to think about what went on with the gross margin this quarter? It's just probably tied a little bit more at the core level to the install activity?
Yes. It really is. And that install activity drives not only implementation costs, but remember we installed more customers this quarter than we ever have. And as those customers get installed and rolled out of implementation, they roll into the customer support team. So we've added already more customers in the first 9 months than we added all of last year.
So we had some accelerated investment in customer support to make sure we could continue answering the phone and servicing our clients to the level that they expect.
Yes, totally understand. I just want to make sure that I have that correct. And then the last one, just on margin. I guess one of the things that we get asked a lot is people sort of get introduced to the story is the margin side of the business. I think people appreciate the top line and the secular tailwind, they always seem to come back to where is the scale, I guess, when they're new to the story. And so any thoughts on sort of what the margin trajectory? I guess, maybe the scalability from this point? I mean, obviously, Precision and Cloud Lending, you're clear that these are investment opportunities. And that obviously impacts, I guess, the margin equation.
But if there's no other really large acquisitions in the immediate future out there, would the right way to think about things be that we should start to see that scale come through, whether it be at the gross or just down at the adjusted EBITDA margin?
Yes. I mean, I think that's the right way. And the 1 thing I would caution you on is to get out over your skis in 2021. Remember, we had planned to make some fair significant investments in PrecisionLender and with the impacts to markets that they were serving, EMEA and the large enterprise clients. We really held back from some of that investment this year, which is part of the improvement you've seen in our adjusted EBITDA line. But I'm very optimistic, based on their pipeline, especially in North America, and you're going to see us start making some of those investments now going into 2021. So for 2021, I would say, on adjusted EBITDA margins, you would see somewhere between, call it, 150 and 200 basis points improvement. And if you look back historically before the large acquisitions, we were posting roughly 200 to 300 basis points of improvement. And I think once we get through 2021, absent any other large acquisitions that we would have to invest in, we would return to those similar levels.
[Operator Instructions] Your next question comes from the line of Robert Napoli from William Blair.
And congratulations, Jennifer. You set a high bar. I really respect your decision. It's got to be a hard job to leave. A lot of exciting things going on there.
Yes, it is. I feel like I'm leaving 1 baby for 2 others, but thanks.
I'd just like to dig a little bit more into the treasury onboarding solution. And maybe what that -- the additional services that you're maybe looking to provide, Matt, to the -- to your bank business clients like adding to the office of the CFO? Or are there other products and services that you're looking to add, like anywhere in the invoicing or payments or that side, the accounts receivable side? Is there -- are there more investments that you want to add through the banks for the office of the CFO, if you would?
Yes, Bob, those are all places that we are definitely going to be looking at going at. Right now, it's still early for treasury onboarding for us. I want to see that gain some more traction, the maturity of the product, but we're also looking at third-party products that we could potentially push through the system as well. I think one of the things that kind of gets lost when people put user accounts out there, 17.2 million end users. Everybody thinks those are just retail customers. We have more than 1 million businesses on this platform. And those businesses need things like background checks, to your point, account receivable technology and banks could be places where they could offer that -- those solutions and we could integrate those into our platform to make it easier.
So we don't even necessarily have to build it as much as we could integrate it with our APIs. So there's a lot of different third-party CFO apps that we could be integrating. We're building on our own. So the opportunity in our customer base, it's not just the consumer side of the business, it's the business side. And there's a lot of opportunity to solve problems and integrate the technology where the CFO can do all these things from the mobile phone, the tablet or desktop and will be the central station that they log into when they get to work and spend their day looking at it or when they're out and about using the technology to manage their cash flow.
Thank you, Joe Vruwink from Baird.
My congrats to you, Jennifer. I wanted to go back to the new sales environment and ask whether you're seeing any different trends emerge depending on maybe the account size or type? I think there's been some commentary recently amongst the regional banks that suggest maybe if you're a smaller institution, your preference maybe to stick with your incumbent vendor if you're pursuing a great investment in technology. But if you're maybe more in the Tier 1 level, there actually is maybe a preference to rerun vendor assessments, maybe inject some new technology into the organization.
Does that fit at all with what you're seeing? Or any sense of how that might trend into 4Q of next year?
The way I would look at it would be -- it's not as much the size of the entity as much as it is the mindset of the ownership and the leadership of the financial institution. I was at a Board dinner 2 weeks ago with $1 billion financial institution that has an owner who is extremely aggressive and wants to use technology as a way to differentiate and compete. And they're looking at a transformation project, they rolled our product out earlier this year. And he has the mindset of Bank of America, Wells, Chase, Citi, whoever you want to think about that's aggressive, that's out there trying to use technology as a way to compete.
There certainly are smaller financial institutions that may have different -- or even larger institutions that have different economic situations where they need to -- I won't be disparaging, but they'll take a lesser product because of the cost associated with it. One of the things that's critical in our pipeline analysis and working with prospects is to determine who that is first because that's not who we're going after. We're not a hamburger shop. We're a steak shop. And if we find a bank that wants to do a digital transformation project, we're going to go in, we're going to file like, yes, we're going to win the deal, we're going to be patient. We're going to cross-sell all the products we've talked about.
And so yes, that may trend towards smaller financial institutions. But I'm more than happy to partner with a $500 million bank or a $200 million credit union if they want to use technology as a way to compete and differentiate and not as a shield.
So for us, I don't -- I think the trends are more about the ownership and where the financial institution is and do they want to be around for a long time? Because if you think back of the history of this company, we have added more end users to the platform through M&A than we have lost. And I think that's indicative of our customer base buys a new technology platform to compete because they want to be around for a long time. And so therefore, they are the net acquirers of these businesses out there. And we're going to stick to that philosophy moving forward because it's paid off for us. And I think you're going to see more M&A, and I want to continue to be on the right side of it.
And operator, we're running tight on time. I want to make sure we get everybody's questions in.
Josh Beck from KBCM.
And Jennifer, congrats. I think it's pretty impressive that you kept your title in retirement. I think that's the most common path, but you pulled it off.
Yes, you all have covered a lot. And I know you'll be talking about this big fintech that's coming under your BaaS service later. But just would like to hear maybe competitively what you think really got you across the line with them? And really what was distinctive? You are obviously not the only offering in the market. And why there was a good partnership there?
Yes. I think to some extent, we have a track record with some of the larger fintechs and delivering. It's the cloud technology that we've built. The simplicity of -- they start right. They're in the sandbox and writing against our APIs. Within 2 weeks, it's quick to market. Our network -- the relationship that we have with banks where we can put them in a depository relationship with the bank, it's less than $10 billion and under Durbin, so the economics are better. And it's best-in-class technology. And whether it's credit cards or these other guys, we continue to be highly differentiated in those offerings. And so that's as simple as it would be. It's cloud, it's quick and it's best-in-class.
Steve Comery from G. Research.
Just wanted to ask a question on the growth that I think has been asked, but maybe a little more directly or differently. So for customers, who haven't closed deals but are in negotiations, I mean, what do they need to get there? I know, Matt, you mentioned the election, the potential stimulus and questions around that. But ex those 2 pieces, are any bank customers looking for more clarity on COVID credit losses before making decisions? And have their feelings changed on that topic now versus [indiscernible] for instance?
Well, I think the election was a big piece of it. But yes, if you go to the very first question of this earnings call, it was about the difference in '16 and '20. And I would say, the big difference is the macro environment around COVID, as it leads to uncertainty, whether it's going to be government lending programs. If the government rolls out another stimulus program, I think it's probably good for the businesses and the customers of the banks. But the bank has to shift their focus to make sure they can distribute those funds immediately. And so the macro environment is probably the long pole in the tent, a lot of these decision delays and then the evaluation of credit risk. But to some extent, government lending programs go hand-in-hand with credit risk because you're helping the customers that may be in trouble. So that would be what I would say are some of the delays after post -- I don't know if it's post election, but post -- whenever we find who the President and everything else is, that's going to be probably the thing that's going to continue to drag -- to delay decision-making somewhat.
But other than that, other than the shooting how was the play, Ms. Lincoln, I mean that's a pretty big deal for us right now. So we're trying to get through those issues, but we're navigating them pretty well, and I feel good about the first -- this quarter and then the next -- and the momentum going into '21.
Arvind Ramnani from Sandler.
And let me quote what you've already heard them. Jennifer, congrats on your retirement. I just wanted to actually ask about your FI partnerships. You've talked about expanding your system and integrated partnerships and the potential impact on driving both revenue growth as well as improving margins and as your product offering continues to expand and your relationships with larger banks continue to expand, do you have any update on sort of expanding your FI partnerships?
Yes. I mean, I think ultimately, Arvind, as we've always said, the customers we sell to, which are about $100 billion in revenue below, I mean, in assets and below on the digital banking side want us to deliver their products, and they want one person, the person that builds the products to deliver them and support them. Now we are seeing some partnerships with other systems integrators to maybe help the project. But ultimately, I don't think you're going to see a significant portion of systems integrators come on the platform side.
On the Cloud Lending side, with force.com, we do have systems integrators that we're working with. But in general, you're not going to see a lot of systems integrators come into play in this space on the direct banking side. But on the Cloud Lending side, there are opportunities for us to do that.
Thanks, Rob. Appreciate you sticking in there too. And I would just thank everybody for their time. And also thanks, Jennifer, for everything she's contributed. And so I hope everybody has a great day, and we'll be in touch, and I look forward to everybody getting the chance to meet David Mehok in the coming weeks. Thank you very much, and have a great week.
Thank you all.
This concludes today's conference call. You may now disconnect.