Banking software provider Q2 (NYSE:QTWO) reported results in line with analysts' expectations in Q2 FY2023, with revenue up 10.1% year on year to $154.5 million. However, next quarter's revenue guidance of $155 million was less impressive, coming in 1.2% below analysts' estimates. Q2 Holdings made a GAAP loss of $23.6 million, improving from its loss of $25.2 million in the same quarter last year.
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Q2 Holdings (QTWO) Q2 FY2023 Highlights:
- Revenue: $154.5 million vs analyst estimates of $154.2 million (small beat)
- EPS: -$0.41 vs analyst expectations of -$0.36 (14.4% miss)
- Revenue Guidance for Q3 2023 is $155 million at the midpoint, below analyst estimates of $156.9 million
- The company reconfirmed revenue guidance for the full year of $624 million at the midpoint
- Free Cash Flow of $3.73 million is up from -$3.19 million in the previous quarter
- Gross Margin (GAAP): 47.8%, up from 44.8% in the same quarter last year
“We continued our solid bookings performance in the second quarter, closing out our best first half of bookings 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 decent over the last two years, growing from $123.6 million in Q2 FY2021 to $154.5 million this quarter.
This quarter, Q2 Holdings's quarterly revenue was once again up 10.1% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $1.52 million in Q2 compared to $6.47 million in Q1 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter's guidance suggests that Q2 Holdings is expecting revenue to grow 7.08% year on year to $155 million, slowing down from the 14.2% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 9.58% over the next 12 months.
The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. 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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 47.8% in Q2.
That means that for every $1 in revenue the company had $0.48 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite trending up over the last year, Q2 Holdings's gross margin is poor for a SaaS business. We have no doubt that shareholders would like to see its improvements continue.
Key Takeaways from Q2 Holdings's Q2 Results
With a market capitalization of $2.08 billion, Q2 Holdings is among smaller companies, but its $280 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
This was a mainly in-line quarter for Q2, with decent cash flow. On the other hand, its underwhelming revenue guidance for next quarter was disappointing. Overall, the results were mixed. The stock is flat after reporting and currently trades at $34.26 per share.
Q2 Holdings may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
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The author has no position in any of the stocks mentioned in this report.