Q2 Holdings (NYSE:QTWO) Misses Q4 Revenue Estimates

Jabin Bastian /
2022/02/15 4:43 pm EST

Banking software provider Q2 (NYSE:QTWO) missed analyst expectations in Q4 FY2021 quarter, with revenue up 21% year on year to $131.8 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $132.2 million at the midpoint, or 2.5% below analyst estimates. Q2 Holdings made a GAAP loss of $25.3 million, improving on its loss of $37.8 million, in the same quarter last year.

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Q2 Holdings (QTWO) Q4 FY2021 Highlights:

  • Revenue: $131.8 million vs analyst estimates of $132.2 million (small miss)
  • EPS (non-GAAP): $0.10 vs analyst estimates of $0.05 ($0.05 beat)
  • Revenue guidance for Q1 2022 is $132.2 million at the midpoint, below analyst estimates of $135.6 million
  • Management's revenue guidance for upcoming financial year 2022 is $578.5 million at the midpoint, missing analyst estimates by 0.44% and predicting 15.9% growth (vs 25.8% in FY2021)
  • Free cash flow of $33.6 million, up from negative free cash flow of $17.6 million in previous quarter
  • Gross Margin (GAAP): 45.1%, up from 41% same quarter last year

“We exited 2021 with strong results, delivering both the second largest bookings quarter and best half-year of bookings performance in company history,” 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 year, growing from quarterly revenue of $108.9 million, to $131.8 million.

Q2 Holdings Total Revenue

Even though Q2 Holdings fell short of revenue estimates, its quarterly revenue growth was still up a very solid 21% year on year. On top of that, revenue increased $5.15 million quarter on quarter, a very strong improvement on the $3.16 million increase in Q3 2021, which shows acceleration of growth, and is great to see.

Guidance for the next quarter indicates Q2 Holdings is expecting revenue to grow 13.4% year on year to $132.2 million, slowing down from the 26.1% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $578.5 million at the midpoint, growing 15.9% compared to 25.8% increase in FY2021.

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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 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 45.1% in Q4.

Q2 Holdings Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.45 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it trending up over the last year this would still be considered low gross margin for a SaaS company and we have no doubt shareholders would like to see the improvements continue.

Key Takeaways from Q2 Holdings's Q4 Results

With a market capitalization of $3.58 billion Q2 Holdings is among smaller companies, but its more than $427.7 million in cash and positive free cash flow over the last twelve months give us confidence that Q2 Holdings has the resources it needs to pursue a high growth business strategy.

We struggled to find many strong positives in these results. On the other hand, the revenue guidance for next year indicates a significant slowdown and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company is flat on the results and currently trades at $66.2 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.

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