Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings Fourth Quarter Results Conference Call. [Operator Instructions] Thank you. Bob Gujavarty, VP, Investor Relations, please go ahead.

Welcome to the Q2 Holdings Conference Call for the fourth quarter and year ended December 31, 2018. I’m Bob Gujavarty, Vice President of Investor Relations, and with me today on the call, are Matt Flake, our CEO; and Jennifer Harris, our CFO. As a reminder, today’s conference call is being broadcast live via webcast. In addition, a replay of the call will be available on our website following the call. By now, you should have received a copy of our press release that was distributed yesterday afternoon. If you have not, it is available on the Investor Relations section of our website. A quick reminder, that Q2 will be hosting an Investor Day in New York on February 28. If you would like to attend, we request you RSVP in advance of the event. But those of you who cannot attend, the event will be webcast and a replay will be available on the Investor Relations section of our website. Before beginning, we must caution you that today’s remarks in this discussion, including statements made during the question-and-answer session, contain forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties, which cause actual results to differ from the results implied by these or other forward-looking statements. Also, these statements are based solely on present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission and the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward-looking statements. During this call, we’ll be referring to both GAAP and non-GAAP financial measures. We believe that non-GAAP measures are representative of how we internally measure the business, and they’re reconciled to GAAP in the tables attached to our press release, which is available on the Investor Relations portion of our website. The non-revenue financial measures we’ll discuss today are non-GAAP unless we state the measure is a GAAP number. Any non-GAAP outlook we provide has not been reconciled to the comparable GAAP outlook because, among other things, we cannot reliably estimate our future stock-based compensation expense, which is dependent on our future stock price. Since we expect our future stock-based compensation expense to have a significant impact on our future GAAP financial results, a reconciliation is not available on a forward-looking basis without unreasonable effort. Let me now turn the call over to Matt Flake.

Thanks, Bob. Today, I’ll share some highlights from the fourth quarter and full year 2018. I’ll then turn the call over to Jennifer to provide a more detailed look at our 2018 financial results as well as guidance for the first quarter and full year 2019. We ended the year with a strong fourth quarter generating revenue of $67.2 million up 30% year-over-year and 11% sequentially. Revenue for the full year was $241.1 million, up 24% year-over-year. We added more than 400,000 users in the fourth quarter, ending the year with 12.8 million users on our digital banking platform, a 23% increase year-over-year. 2018 was a record setting year for Q2, we added approximately 2.4 million users to our digital banking platform, completed two strategic acquisitions and closed the year with our largest bookings quarter ever. With the acquisition of Cloud Lending, we also grew our footprint globally and we now have close to 1,200 employees in locations from Bangalore to Austin. I believe these results and others I will discuss shortly reinforce the demand for digital transformation across the financial services industry and that our approach resonates with the market. These results also emphasize the importance of maintaining our focus on providing best-in-class service to our customers, while we continue to grow. Now, I’ll review our results from the quarter and year in greater detail. Our sales performance this past quarter was a record for highest bookings in a single quarter. 2018 also represented a record in total bookings for the year. We believe our strong bookings for the quarter and year were the result of an improved economic environment and continued sales execution. In the fourth quarter, we saw continued sales momentum from the platform sales team, tying the record for new customers signed in a single quarter,…

Thanks, Matt. I’ll review our fourth quarter and full year results before finishing with guidance for the first quarter and full year of 2019. Total revenue for the fourth quarter was $67.2 million, an increase of 30% year-over-year, and up 11% from the previous quarter. Revenue for the full year 2018 was $241.1 million, up 24% year-over-year. The sequential and year-over-year growth was driven by the strong Q2 digital banking platform user growth combined with approximately $2 million of revenue generated by Cloud Lending and Gro Solutions, during the period from acquisition through the end of the year. Transaction based revenue represented 17% of revenue in the fourth quarter and 16% of revenue for the full year 2018, consistent with both the previous quarter and the prior year. As Matt mentioned, we posted record bookings in the fourth quarter. The strong performance from the sales team combined with the record renewals and contract extensions executed during the quarter contributed to the committed backlog of over $870 million at the end of the year, up approximately $95 million from the third quarter. The acquisition of Cloud Lending and Gro Solutions added approximately $12 million to the total backlog. Our revenue churn for the full year 2018 was 5%, essentially flat with the 4.9% in 2017, and I expect churn to remain in that same range for 2019. The churn driven by M&A activity during the year was roughly half of the total. Our Q2 platform installed customer count at the end of the year was 401, up from 382 at the end of 2017. The growth in customer count was concentrated in the back half of the year as we experienced an accelerated pace of customer go-live and saw less M&A activity among our customers. Our trailing 12-month revenue retention rate…

Thanks, Jennifer. It is clear to me that our business continues to gain momentum and it’s quickly evolving to better enable our customers to prosper in a highly competitive market. I expect 2019 to be another year of solid execution, growth and best-in-class customer service. In closing, I would like to thank the Q2 team for a record setting year, our partners for their help in reaching this achievement and most importantly our customers for the privilege to serve them. Thanks again for joining us this morning. And with that, I’ll turn it over to the operator for questions.

[Operator Instructions] And our first question comes from the line of Sterling Auty from JPMorgan. Your line is open.

Yes, thanks. Hi guys. So I think the biggest difference in 2019 relative to Street expectations is in the EBITDA. It does appear that, it seems to be the acquisitions that are doing that. I want to make sure that, that’s correct. And more specifically, when you look at the Street models versus kind of what you given guidance, is the biggest difference in gross margins? Or is it in the OpEx line? And what do you think changes in the second half to show that improvement that you mentioned when you gave guidance?

So when we gave guidance at the end of last year, we said, we thought the floor would be $20 million, but that guidance was also prior to the acquisition of Gro that we closed at the end of November. So I’m actually quite happy that we were able to absorb the Gro acquisition and still keep the low end of our range at that $20 million floor. I would say that the majority of that is all related to the acquisitions as I mentioned before, Q2 standalone prior to those two acquisitions was tracking to meet kind of where the analysts were. So it’s all related to those acquisitions. And as far as where it’s adding gross margin or OpEx, I would expect gross margin next year to be relatively flat in the first half of the year, given the investments that we’re making as well as the impact of the purchase accounting adjustments on the revenue. And see some moderate improvement in the back half of the year once those purchase accounting adjustments become less significant. For the full year basis, I would expect gross margin improvement somewhere in the 100 basis points range.

Thanks, Sterling.

And our next question comes from the line of Tom Roderick from Stifel. Your line is open.

Hey, good morning, guys. Thanks for taking my question. So a couple things kind of parse through as I think about Matt, your comments on via record bookings quarter, really positive commentary, couple big Tier 1s. And most specifically, I’m trying to wrestle through the backlog disclosure where even though I strip out the $12 million you gave, Jennifer, from the acquisitions. It still looks like it’s up 10% sequentially. So, I guess the two questions I’d have on that is, number one, how would that sort of sequential jump in backlog compare to historical levels? And of course, sort of the underlying question there is, the two Tier 1s in the record bookings, can you provide a little bit of more qualitative assessment of that relative to sort of historical Q4 seasonality. And then the second part of that, Jennifer for you, I know it’s way too early to think about 2020, but as we rollout our numbers and try to put some parameters around it, how would you suggest that the cadence of that shakes out? You know, last year we had a pretty good sense that things were going to accelerate because of the deployments and the Tier 1s coming out at 2018 and into 2019. That is indeed happening. How would you suggest we sort of look at 2020 on a qualitative basis with revenues accelerating from this year? Should they come back to a normal level or stay at the heightened level that will be exiting the year? Thank you, guys.

Thanks, Tom. So first on the backlog, the majority of the backlog as you mentioned, was driven by the Q2 platform business with about a little over 10% of the increase coming from the acquisitions that we made during the quarter. And within the Q2 platform business, a large majority in Q4 actually came from our strong quarter of renewals and extensions. We had several long term renewals and some extensions that added about 2.5 times more during the quarter from renewals than we had in any of the other quarters in 2018. So hopefully that gives you a little bit of color there. And then on 2020, obviously, the first half year-over-year compares in 2019 are going to be relatively easy given the 2018 numbers. So I would expect the year-over-year compares to moderate next year and not be as high as they are exiting the year. So 2020, I would expect more in that mid-20% – 20% to 25% range probably most quarters.

Thanks, Tom.

And our next question comes from the line of Brian Peterson from Raymond James. Your line is open.

Hi, guys. Thanks for taking the question. So one for Matt and then maybe one for Jennifer, if I could, but I just want the retention metric, it was 150% I believe. Just trying to understand how we should think about that metric going forward? And what that’s going to look like from upsell in terms of new products and then users? And just a clarification on the tax rate that was a little bit different than I modeled this quarter? Any help on how we should be looking at that going forward? Thanks, guys.

So our trailing 12-month revenue retention with 114% year-over-year and that – the last couple of years we’d been at 122%. But if you remember at the end of last year, we told you that with no large Tier 1s going live in 2017, it made it for a tough year-over-year, because we had two of our very largest Tier 1s go-live in late 2016 and impacts that number. So we told you on the Q4 call last year that had we not have – if we stripped out the impact of those very large two Tier 1, last year’s number would have been about 112% and we expected this year to be consistent with that. So 114% I think is where we were expecting and I would expect to go forward. Given what I know today that it’s going to remain somewhere in that mid-to-low double-digit teen. So 112% to 114% would be my expectation going forward. And then on the – what was the second part of the question?

The tax...

The tax. Yes, the tax. Yes. We did have a one-time tax benefit in Q4 related to the acquisitions. Approximately $3 million of that benefit that was recorded in Q1 is a one-time resulting from the valuation or the large valuation that was presented to the non-goodwill intangibles related to the CLS and Gro acquisitions. Because of that large value, their deferred tax liabilities actually exceeded their deferred tax assets that were primarily NOLs. And so we had to reverse part of our valuation allowance against that.

Thanks, Brian.

Our next question comes from the line of Pete Heckmann from D.A. Davidson. Your line is open.

Good morning. Thanks for taking my questions. Jennifer, in terms of your full year 2019 guidance, can you give us kind of a run rate revenue for the two acquisitions and then, on a gross basis? And then what made given the deferred revenue write-down what amount would be included in your 2019 guidance?

Yes. So I can tell you that, on Q4, we said that, we expected the CLS acquisition to contribute in the low double-digit millions, after the purchase accounting adjustments to 2019. I still think that’s the right number. And Gro is much smaller than CLS. We acquired them on November 30th and so they contributed about a $100,000 to revenue in December of 2018. And so their impact to 2019 after purchase accounting adjustments is going to be very small.

Thanks, Pete.

Our next question comes from the line of Brett Huff from Stephens. Your line is open.

Good morning. Thanks for taking my questions. Quick one on some of the card-related activity and the business you’re doing with places like Acorn and the Q2 Open. Can you give us some more detailed update on that in terms of those wins that you signed kind of what was the nature of those? Any update there? We were fairly focused on that and think there’s real value there, so when it gets more Intel on that. Thank you.

Yes, Brett. So on the Open side, we had a solid quarter obviously. I think if you look at the difference in each quarter as they grow, the deals are getting larger. So I would say, they’re moving from what – if you’re trying to compare it to the platform side of the business. They’re moving from like Tier 3 deals to Tier 2 deals. Keep in mind, they come to revenue faster and they’re higher margin. And if I looked at the collection of deals that we won in the quarter, there’s a combination of some direct bank deals. There’s a – obviously, the CardSwap deal that we did with the large credit union. And then there’s the fintechs that sign up just to use the CorePro system to run deposits through their – through one of our broker record banks. If I look at the pipeline moving forward, I see that trend continuing. I see the deal is getting larger, more prominent syntax and also more direct banks for some of our existing customers, and even some banks in our customers. So I think that trend’s going to continue. I would say that Investor Day on February 28th, we’re going to dive a little deeper into the open application and what’s happening there. So that would be a good time for us to go a little deeper into it. But I’m very pleased with the activity on the Open side, the execution and the interest that we’re seeing not only from fintechs but from our banking and credit union customers.

Hey, Brett. I just also add on CardSwap in particular, if that’s a monthly subscription fee plus transaction or per swap. The monthly transaction fee is fairly small and the per swap fee unlike our bill pay and mobile remote deposit capture, which tend to be recurring, is typically not recurring because that only takes place when an account holder and end user actually have to change their debit card. So it’s a fairly small number.

Thanks, Brett.

Our next question comes from the line of Brad Berning from Craig-Hallum. Your line is open.

Hey, good morning. Congrats on all the deal activity. I wanted the follow-up on the renewals. You guys talked about, obviously, a large amount of renewals. Can you talk about pricing versus content? And what kind of pricing growth are you seeing in some of the contracts and how did that contribute to the growth in the backlog as well?

So I would say, Brad, that what we’re seeing is, we’ve come out with a lot of new innovation over the last couple of years. And many of these clients have been customers now for five years, and have grown their account holder base significantly. And so we’ve been able to include new features and functionality that they didn’t previously have into the renewals and that helped offset some of the pressure that we got from customers to get volume discounts on their increased user base. So I think we’ve done a really good job at maintaining our renewal base and in some cases growing it depending on the number of the new products that they add.

Thanks, Brad.

Our next question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.

Thanks. This is actually Matt Swanson on for Matt. Matt, as your product portfolio grows, have you had to make any changes kind of into the go-to-market or how your salesforce is telling the story? And when you look out at the pipeline, could there be any changes in the length of sales cycles?

Yes, Matt. So, yes, we are constantly trying to educate the sales force and the relationship management team on the product set, how it ties together with a meaning it can provide to our customers, whether it’s a fintech and all finance and lending, leasing or a deposit-oriented institution. So there’s a lot of energy that goes into that. And Tom Sheehan and [indiscernible] who run those organizations really try to coordinate with the product team and learning and education group to make sure that they’re up to speed. So that’s an ongoing process, one that we’ve got to continue to get better at, but it is something that is one of the challenges that we are always trying to get better at based on the deals that we’ve done. As far as the pipeline, I don’t see any reason why the time to close deals would change. The banking and credit union side of the business, it’s – we’ve covered that many times before. They have a cycle in which they go through to make a decision and I think that’ll be the same. And then the fintechs and the other ones are all – there shouldn’t be any change of anything the more of these deals we get done and the more people that we can show are up and running and in production, the easier it’ll be to close them. So there shouldn’t be any change in timing of closure. Thanks, Matt.

And our next question comes from the line of Mayank Tandon from Needham & Company. Your line is open.

Thank you. Good morning. Matt, just maybe a few thoughts on competition. Obviously, you’re doing really well. It’s not showing up in any slow in your activity. But I would love to get some thoughts on some of the upstarts in the market and if they’re nipping at your heels and any competitive pressures you’re seeing today versus maybe six, 12 months ago that you want to call out.

Yes. Thanks, Mayank. From the competitive environment on the platform side of things, it’s still – you’ve got the big guys that are out there, that are trying to innovate and push stuff out and then you have the upstarts, as you referenced some, see them mostly on the retail side of the business and we don’t win them all. But we tried to do the best to win the deals that make sense for us and fit with our margin profile, our strategic direction. We really want to win deals. There are certain customers that we target or prospect that we target that we really want them – we think they’re a good fit for our ecosystem and so we are doing a good job on winning those. Obviously, with the bookings quarter and year that we had were doing very well in the marketplace. On the lending side, Cloud Lending, that’s mostly upstarts or newer companies, there’s really no large player in there. We’re just trying to maintain discipline around how we sell these, how we deliver them and how we support them. Because we think, we’ve got a long view on that opportunity and we want to make sure, we get it right. So and then the Open side, it’s – we really on the – at least with fintechs, we really feel like we’re the leader out there. In the story, we can tell whether it’s with Acorns or MoneyLion capital and then our bank of record program. It’s very unique. So we have different competitive environments now based on some of the products that we have. But we continue to deepen our product offering. We’re going to continue to integrate those and to bring a very compelling story to whoever the prospect is. And so that’s the focus, but we feel really good about it. Thanks, Mayank.

Our next question comes from the line of Joseph Vafi from Loop Capital. Your line is open.

Hey, guys. Good morning. I was wondering if all of the large Tier 1 to reassigned, exiting last year have moved into production and that’s reflected in the growth right now? Or is there still some of the Tier 1 from about a year ago that have yet to go-live? Thanks.

Okay. Yes, Joseph. I can tell you that, all of the Tier 1s that were signed in 2017 are live in some form or fashion, I think we mentioned several times last year that that a few of those decided to do phase rollout. And so there’s still approximately three of those deals that are not fully live yet that we expect to go live here hopefully by mid-2019 on their full production system. And the deals that were signed in 2018, the majority of those are also set to go-live during the back half of 2019. But they’re back half loaded.

Our next question comes from the line of David Hynes from Canaccord. Your line is open.

Hey, good morning, guys. Two quick ones if I could. Matt, for you, just on the breadth of the platform right, you have retail, corporate, lending, you’ve a bunch of apps round the edges. Does it feel like you now have all the major pillars in place? Or is there more you’d like to add as you think about kind of the scope of problems you’re trying to solve for your customers? And then second for Jennifer, the $12 million from acquisition contribution in the backlog, should we think of those deals coming on with the same multi-year duration or help us frame maybe what that $12 million looks like on an ARR perspective?

So David, on the platform side, I do feel like we have the two major areas which are the deposit side and the lending side. Now there’s so many different trails you can go down on each one of those. And that’s going to be left us to build some of those whether it’s an asset class on the lending side or a feature – commercial feature on the deposit side to help a corporate to run their business. So, we – there is a lot of roadmap for us to get through. We have – I probably had 30 to 40 customers in Austin, since January 1st this year, met with them and they have a list of stuff that they want us to do obviously. So there’s a lot of work to be done, but that’s really the opportunity for us. We don’t sit in a room and spitball our product roadmap. We actually talk to our customers and prospects and try to find out what they want and then roll that into the roadmap. So, they have a list of stuff for us to do and we will tackle that by building it, partnering with people or even potentially buying it. But right now, I really feel good about where we are with the product set. Obviously, we talked about the success in the cross-sell side and then you add Cloud Lending and Gro Solutions to it and it becomes even more of an opportunity for our relationship management team and then we can win on the net new side. So a lot of work to be done, but I feel good about where we are. And this opportunity continues to grow as the pressures of Bank of America, Wells, Chase continue to push down on community and regional financial institutions as well as fintechs.

And David on the backlog of the $12 million, obviously, the majority of that is Cloud Lending. As we said that Gro was very small, Cloud Lending had annual contracts. So all of the backlog related to Cloud Lending will roll off in the next 12 months. Whereas Gro did have on average about three year contracts. So there’s a smaller amount that goes out into the future. But if you look at the overall backlog number of just over $870 million, a little less than 50% of that would be recognized in the next 24 months.

Our next question comes from the line of Terry Tillman from SunTrust Robinson. Your line is open.

Hey Matt, Jennifer and Bob, thanks for taking my question. I have a two-part question. The first part, Matt for you, just you framed it well in terms of just the operating environment improving and plus you have these strategic new product additions. But as we’re moving into 2019 or as we’re in 2019 versus when we’re entering 2018, could you just maybe delve a little deeper the Tier 1 pipeline or sales activity in terms of just framing it, whether it’s the number of opportunities or the size or strategic nature of them? How does that differ versus heading into 2018? And then I had a question on cross-selling.

Yes. So, Terry, I would say that, this is our sixth quarter of signing a Tier 1. And then we’ve also – if you’ve listened to the commentary, there’s been consistent performance on the credit union side and then the bank piece has really picked up, especially since 2017 – 2016, coming off of the rough 2016. So from a pipeline perspective, all of the categories, whether it’s Tier 1, Tier 2, Tier 3 on the area, we focus on, the Q2 Open the environment is just – it’s very positive. I think our marketing footprint has gotten much better and we’re getting in front of more people now. We have more case studies, whether it’s on the open side, obviously Cloud Lending, we’re building those case studies. But there’s – the quarter we just had, whether it’s a $25 billion bank or one of the largest leasing companies in the country are big wins for us considering that we closed the transaction in the middle of October. And so when I look across the pie, it continues to grow. And whether it’s the dollar amount of the pipeline or the deals and obviously it’s a good environment, but we’re also watching closely to see what happens based on what’s going on in the world. But I couldn’t be more positive on the execution of the sales and the relationship management team in 2018 and look forward to continued execution there. And then you had a question on the cross-sell side, you said? Yes, you may have gotten dropped, Terry. See if you can jump back in the queue if you want. Thanks.

Our next question comes from the line of Arvind Ramnani from KeyBanc Capital markets. Your line is open.

Hey, Arvind. Maybe on mute.

Hey, sorry. This is Brian [indiscernible] in for Arvind. Apologies for that. So as the company has changed quite a bit in the past 12, 18 months, you’ve obviously added a number of Tier 1 customers and expand the offering. Have you had to reprioritize how you’ve focused on selling back into your customer base versus trading that off for adding new customers?

I think that it’s not in the last 18 months, I think when you get to – it was probably six or seven years ago, you’re selling new deals and that’s fun because you’re winning the deals and then customers come out the back end and they want to know, how are you going to continue to innovate? And that’s what I call the kind of the ingestion of a startup. And that was 2010 or 2011 that we went through that and we really had to build out a relationship management organization to address the existing customers. So it’s nothing new for us. I think it’s continuing to evolve as we think about these customers. One of the things we’ve noticed in the customer base, as I mentioned, we have a lot of customers that came in, whether they’d come to Austin in the last 40 days. They want to begin to have board level conversations, Chief Strategy Officer conversations, not so much about the day-to-day operations of the products. So that’s one of the things that we’ve really been having to bulk up our leadership team around getting out and talking with customers to drive strategy and how they’re going to deliver this technology. And that’s a good thing for us. But it does require more attention from the top, both on the bank side or the financial institution side and our side. So that’s nothing new for us, but it is evolving as this becomes – I think digital transformation is probably number one or two on the board docket for most of these financial institutions today. Thanks Brian.

And we do have Terry Tillman back on the line for his second question. Terry, your line is open.

Wow. You guys are waiting with anticipation, aren’t you?

Yes, we’re so excited, Terry. We were going to ask you about SunTrust-BB&T deal. But I don’t know if that’s fair.

Yes, I don’t think I should comment on that, but thank you for asking. Yes, the question as it relates to you in terms of you guys are smart people for sure. And over the last couple of years you’ve probably test and learn a lot about cross-selling. And Centrix, it was a nice deal, you have that nice add on. Corporate banking I assume was at least a double or triple. But like what have you learned from those prior products that you’ve added the acquisitions, organic development and being able to apply that to now Gro and more importantly, Cloud Lending. Because what I’m getting at and I want to kind of put your feet to the fire like you asked me that question, you did is, maybe you could accelerate the cross-selling of these newer products just because of some of the things you’ve learned in the past and just how you execute with cross-selling. Thank you.

Yes, Terry. I would say that the thing that we’ve learned, Centrix was a little unique and that we had a deep relationship, 30% of their customer – our customers were their customers. And so we already had the technology integrated. But if you look at the Social Money or Q2 Open product, and if you look at by Cloud and Gro, the thing that we are doing and we’ve moved some really talented people from the Q2 platform side to help execute this, is you have to plan in the right way. You can’t go out and start selling things until you know exactly how the product is going to integrate. You’ve got to make sure you’ve gone out and talked to customers about what they – how they would like for it to work. And so I would say rather than rushing in and trying to sell one to everybody early and create a log jam around the delivery or the quality is that we’re putting a lot of energy into getting the product right. We may lose deals on some of these opportunities in the first six, 12 months. But we believe in the long run, it will make a huge difference in our ability to deliver it more rapidly and with a higher quality and to deliver customer success. So, the lessons learned, if you think about Q2 Open, it’s evolved from just a deposit processing tool to Biller Direct to CardSwap. And that was patience, but also a lot of people put energy into how we’re going to deliver these products, and it’s ongoing. So the energy that goes in on the front end is where we’re – what we’ve learned and we’re going to continue to do that. And I think it’ll pay off for us in 2019 and 2020. Thanks, Terry. Just get back in the queue if you have another question.

Our next question comes from the line from Tim Willi from Wells Fargo. Your line is open.

All right, thanks and good morning. My question was about, I guess sort of the margin outlook and not necessarily near-term, but going to some of the other questions where we talk about how the company has changed quite a bit, bigger banks seem to be more receptive and success there, more products. Is there anything about how you think about the balance of investment versus revenue growth versus protecting or establishing market position that is different now than it may have been a year ago or 18 months ago? Just sort of curious about sort of any high level thoughts around scale and R&D and investment and things like that.

I don’t think there’s any change from where we were at 12 months ago, other than the investment that we’re making to integrate these acquisition. We’ve always been a company even before we were public, it was conscious of growing the top line at a rate that allowed us to make improvements on the bottom line because that’s what our customers and prospects expect. And so, we’ve looked at these acquisitions in such a way that yes, they’re going to be dilutive to margins in 2019 and perhaps the early part of 2020. But we would expect exiting 2020 that they’re actually then breakeven for us at the EBITDA line and it will help us improve go forward because they’re both deals that are implemented on the platform, one on the Salesforce.com platform and the other in the AWS Cloud. And so we don’t have the underlying data center structure and infrastructure costs, which will allow us to grow our gross margins even more over time as those become a larger piece of our revenue.

Thanks, Tim.

Our next question comes from the line of Brian Essex from Morgan Stanley. Your line is open.

Hi. Good morning and thank you for taking the question. Matt, I just had one on Cloud Lending, the $25 billion deal in Northeast, how deep does that go into the organization in terms of origination through underwriting, approval, funding? Is that different than smaller deals? And then maybe to follow up on Terry’s question in the pipeline, I know it’s early days there, any cross-sell and how the – maybe get a sense of how the pipeline into Q2’s installed base with Cloud Lending might be shaping up?

Yes. So on the Cloud deal, it’s a consumer lending product and it’s going to – it’s one line of business that they’re going to go through. So it goes all the way from the borrower signs up through closing the loan. That’s all I’ll say on that. And from a cross-sell perspective, the pipeline with Cloud there’s a tremendous amount of interest from our customer base, whether it’s the customers that I’ve mentioned, they’ve come in or from what the field reps are saying out there talking to the existing customers. And also we are beginning to present it as part of our platform where we can show the – some of the integration opportunities. And I think it represents what could be our largest cross-sell in the back half of 2019. I think it’s going to take a little time before it gets there. But as I mentioned, we’re trying to plan appropriately and make sure that we can deliver on expectations. But keep in mind, we’re still driving the Cloud Lending pipeline globally that was already there and enhancing it. Signing the deals that we talked about in the fourth quarter. For me, it was a very strong indication that I think the customers and prospects like the fact that the Cloud is no longer a small company. It’s owned by private equity and they’re part of a company with a mission and willing to invest in the technology to make it scalable and continue to enhance it. So I’m very optimistic about it. The North American banking opportunity with our customer base, our sales organization, our relationship management organization is right for us to go take this platform to the customers and begin to win a bunch of deal. So it should be a big part of cross-sells in the back half of 2019. And I look forward to potentially be one of the – the number one cross-sell for us in 2020. Thanks, Brian.

Our next question comes from the line of Arvind Ramnani from KeyBanc. Your line is open.

Hi. Thanks for getting me back in. Just wanted to – can I ask you a follow up on these larger deals? How is your pricing and margins kind of expected to change as you kind of increase the footprint at some of your larger accounts?

Yes, Arvind. So I think as we’ve mentioned before on the larger deals, we tend to get a little better pricing on the services component because those types of institutions are used to more like enterprise rollouts and paying for the implementation services. So while the subscription fee is probably a very similar margin, the services is typically on an economic perspective somewhere in the 20% or 20% to 25% gross margin. Whereas the smaller deals, the services component on an economic basis is closer to breakeven. The thing to remember there though is they tend to depress gross margins early on whenever you sign them because they do take longer to get to revenue and we don’t recognize any of that revenue until they go live. So, they have an initial negative impact, but over the longer-term, they you have a positive impact.

Thanks, Arvind.

Our last question comes from the line of Brad Berning from Craig-Hallum. Your line is open.

Hi. Good morning. Just wanted to take your perspective on the engagement that you guys are seeing in the 70% growth. And as you think about your community and regional banks and bigger banks and then you also see the fintech platforms through Q2 Open. How do you think about maintaining deposit account relevance on the community bank side and helping them from a product rollout standpoint to maintain engagement opportunities as they go forward and the competition from fintech versus kind of the banking world, heats up over the years ahead? Given your unique perspective to see both sides and help both sides. How do you think about your product roadmap to help them?

Yes, Brad. So I’ll try to make it as simple as possible. I think at the end of the day when you see a 70% increase, you see 2 billion logins. For us, what that means is more data for our customers to understand their customers. So why somebody who’s logging in, what their cash flow looks like, what their spending habits are. And then you take that engagement, you begin to provide relevant offers or information to them. And that’s where – if you look at our Q2 SMART product, I think we closed 35 smart deals in the fourth quarter, which is obviously a record for us. But that’s what the engagement is bringing us, the data for the bank or credit union or the fintech to be able to use that information to get to know their customer better, to provide better services or cross-sell. So the engagement for us is nothing but a win because we get more data on the account holder and then from there we can begin to use more of that information to help them drive deeper relationships and maybe even make the client a borrower or buy other products. So we’re very excited about it. It’s just more data for us to use. Thanks, Brad.

And our next question does come from the line of Brian Essex from Morgan Stanley. Your line is open.

Hi. Thanks. Just wanted to sneak one quick follow-up in for Jennifer if I could. Just on the cash flow statement, that it looks like we have a bit of a working capital drag for the year and just want to understand how to get our arms around cash flow conversion going forward. And that’ll be it. Thanks.

Yes. I think the investments that we’re making in 2019 related to the Cloud Lending and Gro acquisitions, the retention payments around those as well as the possible earn-out payment related to Cloud Lending will keep us from probably being free cash flow positive in 2019. But then again, if there is an earn-out payment achieved at the June 30 milestone, that’s a good thing for future revenue growth. So I think it’s a good trade off. But like I said, it will limit our ability to be free cash flow positive in 2019, but I think you’ll still see us generate cash from operations.

And there are no further questions at this time. This does conclude today’s conference call. You may now disconnect.