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Q2 Holdings (NYSE:QTWO) Exceeds Q1 Expectations But Full Year Guidance Underwhelms


Adam Hejl /
2023/05/09 4:43 pm EDT
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Banking software provider Q2 (NYSE:QTWO) reported results ahead of analyst expectations in the Q1 FY2023 quarter, with revenue up 14.1% year on year to $153 million. However, guidance for the next quarter was less impressive, coming in at $154.1 million at the midpoint, being 1.43% below analyst estimates. Q2 Holdings made a GAAP loss of $516 thousand, improving on its loss of $23.6 million, in the same quarter last year.

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

Q2 Holdings (QTWO) Q1 FY2023 Highlights:

  • Revenue: $153 million vs analyst estimates of $150.1 million (1.95% beat)
  • EPS: -$0.01 vs analyst estimates of -$0.42 ($0.41 beat)
  • Revenue guidance for Q2 2023 is $154.1 million at the midpoint, below analyst estimates of $156.3 million
  • The company dropped revenue guidance for the full year, from $636 million to $624 million at the midpoint, a 1.89% decrease
  • Free cash flow was negative $3.19 million, down from positive free cash flow of $42.6 million in previous quarter
  • Gross Margin (GAAP): 47.9%, up from 45.1% same quarter last year

“We delivered strong financial results and sales execution in the first quarter, in spite of a complex backdrop in the regional and community banking space," said Q2 CEO Matt Flake.

Founded in 2004 by Hank Seale, Q2 (NYSE:QTWO) offers software as a service that enables small banks provide online banking and consumer lending services to their clients.

Consumers these days are accustomed to frictionless digital experiences from online shopping to ordering food or hailing a cab. Financial services firms are notoriously risk averse in adopting modern software, often lacking the resources or competency to develop the digital solutions in-house. That drives demand for software as a service platforms that allows banks and other finance institutions to offer the digital services without having to run or maintain them.

Sales Growth

As you can see below, Q2 Holdings's revenue growth has been mediocre over the last two years, growing from quarterly revenue of $116.5 million in Q1 FY2021, to $153 million.

Q2 Holdings Total Revenue

This quarter, Q2 Holdings's quarterly revenue was once again up 14.1% year on year. We can see that the company increased revenue by $6.47 million quarter on quarter. That's a solid improvement on the $1.79 million increase in Q4 2022, so shareholders should appreciate the acceleration of growth.

Guidance for the next quarter indicates Q2 Holdings is expecting revenue to grow 9.83% year on year to $154.1 million, slowing down from the 13.5% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 11.4% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Profitability

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 Holdings's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 47.9% in Q1.

Q2 Holdings Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.48 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from Q2 Holdings's Q1 Results

With a market capitalization of $1.31 billion Q2 Holdings is among smaller companies, but its more than $271.7 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were very impressed by the strong improvements in Q2 Holdings’s gross margin this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was unfortunate to see that Q2 Holdings's revenue guidance for the full year missed analysts' expectations and the revenue guidance for the next quarter missed analysts' expectations. However, EBITDA guidance for next quarter beat slightly, and EBITDA guidance for the full year was ahead. Overall, it seems to us that this was a complicated quarter for Q2 Holdings. The company is up 4.26% on the results and currently trades at $23.98 per share.

Q2 Holdings may have had a tough quarter, but does that actually create an opportunity to invest 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 actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

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