Q2 Holdings (NYSE:QTWO) Misses Q3 Sales Targets, Stock Drops

Kayode Omotosho /
2022/11/07 4:22 pm EST

Banking software provider Q2 (NYSE:QTWO) fell short of analyst expectations in Q3 FY2022 quarter, with revenue up 14.2% year on year to $144.7 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $149.4 million at the midpoint, or 5.18% below analyst estimates. Q2 Holdings made a GAAP loss of $27.7 million, improving on its loss of $31.5 million, in the same quarter last year.

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Q2 Holdings (QTWO) Q3 FY2022 Highlights:

  • Revenue: $144.7 million vs analyst estimates of $146.7 million (1.37% miss)
  • EPS (non-GAAP): $0.10 vs analyst estimates of $0.04 ($0.06 beat)
  • Revenue guidance for Q4 2022 is $149.4 million at the midpoint, below analyst estimates of $157.5 million
  • Free cash flow was negative $3.86 million, compared to negative free cash flow of $11 million in previous quarter
  • Gross Margin (GAAP): 46.1%, up from 45% same quarter last year

“The third quarter represented our strongest bookings performance of the year,” 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 strong over the last two years, growing from quarterly revenue of $103.8 million in Q3 FY2020, to $144.7 million.

Q2 Holdings Total Revenue

This quarter, Q2 Holdings's quarterly revenue was once again up 14.2% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $4.44 million in Q3, compared to $6.23 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Q2 Holdings is expecting revenue to grow 13.2% year on year to $149.4 million, slowing down from the 21% 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 19.2% 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.


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 46.1% in Q3.

Q2 Holdings Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.46 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 Q3 Results

With a market capitalization of $1.52 billion Q2 Holdings is among smaller companies, but its more than $395.6 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 enjoyed seeing Q2 Holdings’s improve their gross margin materially this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that Q2 Holdings's revenue guidance missed analysts' expectations. Overall, this quarter's results could have been better. The company is down 5.64% on the results and currently trades at $24.89 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.