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No Surprises In Q2's (NYSE:NYSE:QTWO) Q3 Sales Numbers


Full Report / November 03, 2021
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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.

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

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.

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 $103.8 million, to $126.7 million.

Q2 Total Revenue

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.

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.

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 we would 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.

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.

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. 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 7.8, 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, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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