Banking software provider Q2 (NYSE:QTWO) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 13.5% year on year to $140.3 million. However, guidance for the next quarter was less impressive, coming in at $146.8 million at the midpoint, being 0.64% below analyst estimates. Q2 Holdings made a GAAP loss of $25.2 million, improving on its loss of $30.1 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) Q2 FY2022 Highlights:
- Revenue: $140.3 million vs analyst estimates of $140.2 million (small beat)
- EPS (non-GAAP): $0.07 vs analyst estimates of $0.05 (33.6% beat)
- Revenue guidance for Q3 2022 is $146.8 million at the midpoint, below analyst estimates of $147.7 million
- The company reconfirmed revenue guidance for the full year, at $579.5 million at the midpoint
- Free cash flow was negative $16.1 million, compared to negative free cash flow of $12.7 million in previous quarter
- Gross Margin (GAAP): 44.8%, in line with same quarter last year
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 year, growing from quarterly revenue of $123.5 million, to $140.3 million.
This quarter, Q2 Holdings's quarterly revenue was once again up 13.5% year on year. We can see that the company increased revenue by $6.23 million quarter on quarter. That's a solid improvement on the $2.18 million increase in Q1 2022, so shareholders should appreciate the acceleration of growth.
Guidance for the next quarter indicates Q2 Holdings is expecting revenue to grow 15.8% year on year to $146.8 million, slowing down from the 22% 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 18.6% 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 44.8% in Q2.
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 we would like to see it start improving.
Key Takeaways from Q2 Holdings's Q2 Results
With a market capitalization of $2.63 billion Q2 Holdings is among smaller companies, but its more than $211.1 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.
We struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the revenue growth was quite weak. Overall, this quarter's results were not the best we've seen from Q2 Holdings. The company is down 4.01% on the results and currently trades at $46.16 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.