No Surprises In Q2's (NYSE:NYSE:QTWO) Q2 Sales Numbers, Next Quarter Growth Looks Optimistic

Jabin Bastian /
2021/08/04 4:40 pm EDT
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Banking software provider Q2 (NYSE:QTWO) reported results in line with analyst expectations in Q2 FY2021 quarter, with revenue up 26.6% year on year to $123.5 million. Q2 made a GAAP loss of $30.1 million, improving on its loss of $38.9 million, in the same quarter last year.

Is now the time to buy Q2? Access our full analysis of the earnings results here, it's free.

Q2 (NYSE:QTWO) Q2 FY2021 Highlights:

  • Revenue: $123.5 million vs analyst estimates of $122.7 million (small beat)
  • EPS (non-GAAP): $0.09 vs analyst estimates of $0.08 (19.3% beat)
  • Revenue guidance for Q3 2021 is $125.7 million at the midpoint, above analyst estimates of $124.7 million
  • The company reconfirmed revenue guidance for the full year, at $498.5 million at the midpoint
  • Free cash flow of $1.73 million, up from negative free cash flow of -$12.42 million in previous quarter
  • Gross Margin (GAAP): 44.7%, down from 45.7% previous quarter

“There were a number of key highlights across the business during the quarter,” said Matt Flake, Q2 CEO. "We had key wins in digital banking, lending, and banking-as-a-service, and we announced the launch of Q2 Innovation Studio, which gives our digital banking customers a powerful set of tools to bring innovation to their customers faster and differentiate their offerings. Given the state of our pipeline across the business, we're optimistic that deal activity will begin to return to pre-pandemic levels in the back half of the year.”

Founded in 2004, Q2 offers software as a service that enables small banks provide online banking and consumer lending services to their clients.

Community banks and credit unions are under competitive pressure and their numbers have been slowly decreasing due to market consolidation, but there are still thousands of them across the country, and to stay in the game they need to offer digital experiences to their customers.

Sales Growth

As you can see below, Q2's revenue growth has been strong over the last year, growing from quarterly revenue of $97.5 million, to $123.5 million.

Q2 Total Revenue

This quarter, Q2's quarterly revenue was once again up a very solid 26.6% year on year. Quarter on quarter the revenue increased by $7.05 million in Q2, which was in line with Q1 2021. This steady quarter-on-quarter growth shows the company is able to maintain its steady growth trajectory.

Analysts covering the company are expecting the revenues to grow 20.1% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

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What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Q2's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 44.7% in Q2.

Q2 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.44 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Key Takeaways from Q2's Q2 Results

With market capitalisation of $5.54 billion Q2 is among smaller companies, but its more than $411.2 million in cash and positive free cash flow over the last twelve months give us confidence that Q2 has the resources it needs to pursue a high growth business strategy.

Q2 delivered solid revenue growth this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, there was a deterioration in gross margin. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 1.17% on the results and currently trades at $99.91 per share.

Should you invest in Q2 right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our full report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.