Q2 Holdings (NYSE:QTWO) Q1 Sales Beat Estimates But Quarterly Guidance Underwhelms

Full Report / June 28, 2022
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Banking software provider Q2 (NYSE:QTWO) reported results ahead of analyst expectations in the Q1 FY2022 quarter, with revenue up 15% year on year to $134 million. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $140.2 million, 0.19% below analyst estimates. Q2 Holdings made a GAAP loss of $23.5 million, improving on its loss of $25.6 million, in the same quarter last year.

Q2 Holdings (QTWO) Q1 FY2022 Highlights:

  • Revenue: $134 million vs analyst estimates of $132.5 million (1.21% beat)
  • EPS (non-GAAP): $0.03 vs analyst estimates of $0.06 (-$0.03 miss)
  • Revenue guidance for Q2 2022 is $140.2 million at the midpoint, 0.19% below analyst estimates
  • The company reconfirmed revenue guidance for the full year, at $579.5 million at the midpoint
  • Free cash flow was negative $12.7 million, down from positive free cash flow of $33.6 million in previous quarter
  • Gross Margin (GAAP): 45%, down from 45.7% 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.

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.

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 Holdings's revenue growth has been strong over the last year, growing from quarterly revenue of $116.5 million, to $134 million.

Q2 Holdings Total Revenue

This quarter, Q2 Holdings's quarterly revenue was once again up 15% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $2.18 million in Q1, compared to $5.15 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Q2 Holdings is expecting revenue to grow 13.4% year on year to $140.2 million, slowing down from the 26.6% 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 17.1% over the next twelve months.


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 45% in Q1.

Q2 Holdings Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.45 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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Q2 Holdings burned through $12.7 million in Q1, reducing the cash burn by 2.95% year on year.

Q2 Holdings Free Cash Flow

Q2 Holdings has generated $4.93 million in free cash flow over the last twelve months, 0.95% of revenues. This FCF margin is a result of Q2 Holdings asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

Key Takeaways from Q2 Holdings's Q1 Results

With a market capitalization of $2.95 billion Q2 Holdings is among smaller companies, but its more than $413.6 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 Holdings topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand, revenue growth is overall a bit slower these days and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company is flat on the results and currently trades at $41.6 per share.

Is Now The Time?

When considering Q2 Holdings, 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 Holdings 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 Holdings's price to sales ratio based on the next twelve months is 5.0x, 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.

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