Banking software provider Q2 (NYSE:QTWO) reported results in line with analyst expectations in Q3 FY2021 quarter, with revenue up 22% year on year to $126.7 million. The company expects that next quarter's revenue would be around $132 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Q2 made a GAAP loss of $31.5 million, down on its loss of $26.7 million, in the same quarter last year.
Is now the time to buy Q2? Access our full analysis of the earnings results here, it's free.
Q2 (NYSE:QTWO) Q3 FY2021 Highlights:
- Revenue: $126.7 million vs analyst estimates of $125.7 million (small beat)
- EPS (non-GAAP): $0.03 vs analyst expectations of $0.04 (23.9% miss)
- Revenue guidance for Q4 2021 is $132 million at the midpoint, roughly in line with what analysts were expecting
- Free cash flow was negative $17.6 million, down from positive free cash flow of $1.73 million in previous quarter
- Gross Margin (GAAP): 44.9%, in line with same quarter last year
“In the third quarter, we experienced strong sales performance consistent with our previous belief that the buying environment would steadily improve in the back half of 2021,” said Matt Flake, Q2 CEO.
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.
Community banks and credit unions are under competitive pressure and their numbers have been slowly decreasing due to market consolidation, but there are still thousands of them across the country, and to stay in the game they need to offer digital experiences to their customers.
Sales Growth
As you can see below, Q2's revenue growth has been strong over the last year, growing from quarterly revenue of $103.8 million, to $126.7 million.
This quarter, Q2's quarterly revenue was once again up a very solid 22% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $3.16 million in Q3, compared to $7.05 million in Q2 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Analysts covering the company are expecting the revenues to grow 18.2% over the next twelve months, although estimates are likely to change post earnings.
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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's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 44.9% in Q3.
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 investors might like to see it start improving.
Key Takeaways from Q2's Q3 Results
With a market capitalization of $4.3 billion Q2 is among smaller companies, but its more than $294.7 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.
Zooming out, we think this was a decent quarter, showing the company is staying on target. The company is flat on the results and currently trades at $77.74 per share.
Should you invest in Q2 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.