Q2 Holdings (NYSE:QTWO) Reports Sales Below Analyst Estimates In Q4 Earnings

Full Report / February 22, 2023
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Banking software provider Q2 (NYSE:QTWO) missed analyst expectations in Q4 FY2022 quarter, with revenue up 11.1% year on year to $146.5 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $150.5 million at the midpoint, or 1.47% below analyst estimates. Q2 Holdings made a GAAP loss of $32.4 million, down on its loss of $25.4 million, in the same quarter last year.

Q2 Holdings (QTWO) Q4 FY2022 Highlights:

  • Revenue: $146.5 million vs analyst estimates of $149.3 million (1.87% miss)
  • EPS (non-GAAP): $0.06 vs analyst expectations of $0.12 (48.9% miss)
  • Revenue guidance for Q1 2023 is $150.5 million at the midpoint, below analyst estimates of $152.7 million
  • Management's revenue guidance for upcoming financial year 2023 is $636 million at the midpoint, missing analyst estimates by 1.61% and predicting 12.4% growth (vs 13.5% in FY2022)
  • Free cash flow of $39.3 million, up from $2.31 million in previous quarter
  • Gross Margin (GAAP): 45.2%, 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.

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 solid over the last two years, growing from quarterly revenue of $109 million in Q4 FY2020, to $146.5 million.

Q2 Holdings Total Revenue

This quarter, Q2 Holdings's quarterly revenue was once again up 11.1% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $1.79 million in Q4, compared to $4.44 million in Q3 2022. 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 12.3% year on year to $150.5 million, slowing down from the 15.1% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $636 million at the midpoint, growing 12.4% compared to 13.4% increase in FY2022.


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 45.2% in Q4.

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

Cash Is King

If you have followed 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's free cash flow came in at $39.3 million in Q4, up 10.5% year on year.

Q2 Holdings Free Cash Flow

Q2 Holdings has generated $17.9 million in free cash flow over the last twelve months, 3.16% 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 Q4 Results

With a market capitalization of $1.91 billion Q2 Holdings is among smaller companies, but its more than $433.4 million in cash and positive free cash flow over the last twelve months give us confidence that Q2 Holdings has the resources it needs to pursue a high growth business strategy.

We enjoyed the optimistic revenue guidance Q2 Holdings provided for the next year. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that Q2 Holdings's revenue guidance for the full year missed analysts' expectations. Overall, this quarter's results were not the best we've seen from Q2 Holdings. The company is down 1.64% on the results and currently trades at $31.21 per share.

Is Now The Time?

Q2 Holdings may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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 a little slower. And on top of that, 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 2.8x, 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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