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Q2 Holdings (NYSE:QTWO) Reports Q2 In Line With Expectations But Quarterly Guidance Underwhelms


Full Report / September 28, 2022
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Banking software provider Q2 (NYSE:QTWO) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 13.5% year on year to $140.3 million. However, guidance for the next quarter was less impressive, coming in at $146.8 million at the midpoint, being 0.64% below analyst estimates. Q2 Holdings made a GAAP loss of $25.2 million, improving on its loss of $30.1 million, in the same quarter last year.

Q2 Holdings (QTWO) Q2 FY2022 Highlights:

  • Revenue: $140.3 million vs analyst estimates of $140.2 million (small beat)
  • EPS (non-GAAP): $0.07 vs analyst estimates of $0.05 (33.6% beat)
  • Revenue guidance for Q3 2022 is $146.8 million at the midpoint, below analyst estimates of $147.7 million
  • The company reconfirmed revenue guidance for the full year, at $579.5 million at the midpoint
  • Free cash flow was negative $16.1 million, compared to negative free cash flow of $12.7 million in previous quarter
  • Gross Margin (GAAP): 44.8%, 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 mediocre over the last year, growing from quarterly revenue of $123.5 million, to $140.3 million.

Q2 Holdings Total Revenue

This quarter, Q2 Holdings's quarterly revenue was once again up 13.5% year on year. We can see that the company increased revenue by $6.23 million quarter on quarter. That's a solid improvement on the $2.18 million increase in Q1 2022, so shareholders should appreciate the acceleration of growth.

Guidance for the next quarter indicates Q2 Holdings is expecting revenue to grow 15.8% year on year to $146.8 million, slowing down from the 22% 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 18.6% over the next twelve months.

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 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 44.8% in Q2.

Q2 Holdings 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.

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 $16.1 million in Q2, with cash flow turning negative year on year.

Q2 Holdings Free Cash Flow

Q2 Holdings has burned through $12.9 million in cash over the last twelve months, resulting in a negative 2.43% free cash flow margin. This below average FCF margin is a result of Q2 Holdings's need to invest in the business to continue penetrating its market.

Key Takeaways from Q2 Holdings's Q2 Results

With a market capitalization of $2.63 billion Q2 Holdings is among smaller companies, but its more than $211.1 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 struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the revenue growth was quite weak. Overall, this quarter's results were not the best we've seen from Q2 Holdings. The company currently trades at $31.5 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 mediocre, and analysts believe that rate will remain roughly steady. And on top of that, unfortunately its gross margins show its business model is much less lucrative than the best software businesses, and customer acquisition is less efficient than many comparable companies.

Q2 Holdings's price to sales ratio based on the next twelve months is 4.3x, 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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