Q2 Holdings (NYSE:QTWO) Reports Q4 In Line With Expectations, Guides For 9.8% Growth Next Year

Full Report / February 21, 2024

Banking software provider Q2 (NYSE:QTWO) reported results in line with analysts' expectations in Q4 FY2023, with revenue up 10.6% year on year to $162.1 million. On the other hand, next quarter's revenue guidance of $163.2 million was less impressive, coming in 1.1% below analysts' estimates. It made a GAAP loss of $0.31 per share, down from its profit of $0.06 per share in the same quarter last year.

Q2 Holdings (QTWO) Q4 FY2023 Highlights:

  • Revenue: $162.1 million vs analyst estimates of $161.5 million (small beat)
  • EPS: -$0.31 vs analyst estimates of -$0.32 (1.9% beat)
  • Revenue Guidance for Q1 2024 is $163.2 million at the midpoint, below analyst estimates of $165 million
  • Management's revenue guidance for the upcoming financial year 2024 is $686 million at the midpoint, in line with analyst expectations and implying 9.8% growth (vs 10.5% in FY2023)
  • Free Cash Flow of $29.82 million, up from $9.28 million in the previous quarter
  • Gross Margin (GAAP): 50.2%, up from 45.2% in the same quarter last year
  • Market Capitalization: $2.47 billion

Founded in 2004 by Hank Seale, Q2 (NYSE:QTWO) offers software-as-a-service that enables small banks to 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.

Banking Software

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 unremarkable over the last two years, growing from $131.9 million in Q4 FY2021 to $162.1 million this quarter.

Q2 Holdings Total Revenue

This quarter, Q2 Holdings's quarterly revenue was once again up 10.6% year on year. We can see that Q2 Holdings's revenue increased by $7.15 million quarter on quarter, which is a solid improvement from the $436,000 increase in Q3 2023. Shareholders should applaud the acceleration of growth.

Next quarter's guidance suggests that Q2 Holdings is expecting revenue to grow 6.7% year on year to $163.2 million, slowing down from the 14.1% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $686 million at the midpoint, growing 9.8% year on year compared to the 10.4% increase in FY2023.


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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 50.2% in Q4.

Q2 Holdings Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.50 left to spend on developing new products, sales and marketing, and general administrative overhead. While its gross margin has improved significantly since the previous quarter, Q2 Holdings's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Q2 Holdings's free cash flow came in at $29.82 million in Q4, down 24.2% year on year.

Q2 Holdings Free Cash Flow

Q2 Holdings has generated $39.65 million in free cash flow over the last 12 months, or 6.3% of revenue. This FCF margin enables it to reinvest in its business without depending on the capital markets.

Key Takeaways from Q2 Holdings's Q4 Results

Q2 Holdings delivered a decent gross margin improvement this quarter, along side with a small beat on the top line. Guidance shows the growth is slow but steady. Overall, this was a mixed quarter for Q2 Holdings. The stock is up 1.6% after reporting and currently trades at $42.5 per share.

Is Now The Time?

When considering an investment in Q2 Holdings, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for everyone who's making the lives of others easier through technology, but in case of Q2 Holdings, we'll be cheering from the sidelines. Its , and analysts expect growth to deteriorate from here. And while its customers are increasing their spending quite quickly, suggesting they love the product, the downside is its gross margins show its business model is much less lucrative than the best software businesses. On top of that, its low free cash flow margins give it little breathing room.

Q2 Holdings's price-to-sales ratio based on the next 12 months is 3.6x, 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.

Wall Street analysts covering the company had a one-year price target of $43.73 per share right before these results (compared to the current share price of $42.50).

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