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No Surprises In Q2's (NYSE:NYSE:QTWO) Q2 Sales Numbers, Next Quarter Growth Looks Optimistic


Full Report / August 04, 2021
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Banking software provider Q2 (NYSE:QTWO) reported results in line with analyst expectations in Q2 FY2021 quarter, with revenue up 26.6% year on year to $123.5 million. Q2 made a GAAP loss of $30.1 million, improving on its loss of $38.9 million, in the same quarter last year.

Q2 (NYSE:QTWO) Q2 FY2021 Highlights:

  • Revenue: $123.5 million vs analyst estimates of $122.7 million (small beat)
  • EPS (non-GAAP): $0.09 vs analyst estimates of $0.08 (19.3% beat)
  • Revenue guidance for Q3 2021 is $125.7 million at the midpoint, above analyst estimates of $124.7 million
  • The company reconfirmed revenue guidance for the full year, at $498.5 million at the midpoint
  • Free cash flow of $1.73 million, up from negative free cash flow of -$12.42 million in previous quarter
  • Gross Margin (GAAP): 44.7%, down from 45.7% previous quarter

Founded in 2004, Q2 offers software as a service that enables small banks provide online banking and consumer lending services to their clients.

Small, regional and community banks often lack the resources required to manage their own tech infrastructure, making it difficult for them to compete with polished offerings of large national banks. Q2’s cloud-based platform provides them with mobile apps and websites that have the same functionalities big banks offer and allows them to put their own branding on it.

Q2 then handles all the regulatory compliance and security and provides banks with data-based insights on their customers, allowing them to offer more personalized products and better customer service.

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.

Q2 and companies like nCino (NASDAQ:NCNO) or Alkami (NASDAQ:ALKT) are offering them a chance to keep up with the bigger players in the market.

Sales Growth

As you can see below, Q2's revenue growth has been strong over the last year, growing from quarterly revenue of $97.5 million, to $123.5 million.

Q2 Total Revenue

This quarter, Q2's quarterly revenue was once again up a very solid 26.6% year on year. Quarter on quarter the revenue increased by $7.05 million in Q2, which was in line with Q1 2021. This steady quarter-on-quarter growth shows the company is able to maintain its steady growth trajectory.

Analysts covering the company are expecting the revenues to grow 20.1% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

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 44.7% in Q2.

Q2 Gross Margin (GAAP)

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 it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Key Takeaways from Q2's Q2 Results

With market capitalisation of $5.54 billion Q2 is among smaller companies, but its more than $411.2 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

Q2 delivered solid revenue growth this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, there was a deterioration in gross margin. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 1.17% on the results and currently trades at $99.91 per share.

Is Now The Time?

When considering Q2, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Q2 we will be cheering from the sidelines. Its revenue growth has been solid. But while its efficient customer acquisition is better than many similar companies, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.

Q2's price to sales ratio based on the next twelve months is 10.2, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.