Q2 Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Q2 Holdings provides SaaS digital banking and lending solutions to financial institutions, FinTechs, alternative finance companies and brands. Unless otherwise indicated, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $154.5M | $140.3M | $307.5M | $274.4M |
| Gross profit / margin | $73.8M / 47.8% | $62.9M / 44.8% | $147.1M / 47.8% | $123.3M / 44.9% |
| Operating loss | $(23.7)M | $(23.8)M | $(44.9)M | $(45.2)M |
| Net loss | $(23.6)M | $(25.2)M | $(24.1)M | $(48.8)M |
| Adjusted EBITDA, non-GAAP | $17.6M | $9.7M | $34.1M | $17.7M |
Q2 revenue grew 10.1% year over year; six-month revenue grew 12.1%. Subscription revenue was $116.0M in Q2, up from $100.8M, while transactional revenue declined to $17.0M from $17.7M and services and other revenue was $21.5M versus $21.8M. For the first half, subscription revenue increased to $231.2M from $197.4M; transactional revenue fell to $33.3M from $34.8M.
For the first half, the net loss included a $19.9M gain on early extinguishment of debt. Adjusted EBITDA is a non-GAAP measure; the company excludes, among other items, stock-based compensation, amortization, restructuring charges and the debt-extinguishment gain. Stock-based compensation expense was $38.7M in the first half, versus $31.5M.
Cash flow, liquidity and debt
- First-half operating cash flow was positive $17.0M, compared with cash used of $13.8M in the prior-year period. Investing activities provided $57.9M, principally reflecting investment maturities; financing activities used $156.5M, primarily for note repurchases and repayment of the 2023 Notes.
- Cash, cash equivalents and investments totaled $280.0M at June 30, 2023, down from $433.4M at December 31, 2022. Cash and cash equivalents were $118.2M; investments were $161.8M. The company said available liquidity and operating cash flows were adequate for requirements over the next 12 months.
- Outstanding note principal was $495.0M: $304.0M of 0.75% convertible notes due 2026 and $191.0M of 0.125% convertible notes due 2025. The company repurchased $171.3M principal of the 2025 and 2026 Notes in March for cash and recorded the $19.9M gain. The 2023 Notes matured and were repaid in February. The 2025 and 2026 Notes were not convertible as of June 30.
- Operating lease liabilities totaled $57.9M. Disclosed future contractual commitments totaled $633.9M, including note-related interest and other purchase commitments; variable usage amounts were excluded.
Material changes and operating measures
- Gross margin improved year over year, as revenue growth outpaced cost-of-revenue growth. Operating expenses rose to $97.5M in Q2 from $86.7M, including higher general and administrative expense and $2.3M of lease and other restructuring charges.
- First-half registered users reached 21.7M, compared with 20.2M at June 30, 2022. Annualized recurring revenue was $681.2M, compared with $615.5M a year earlier. These are company-defined operating metrics, not GAAP revenue or forecasts.
- Remaining performance obligations were $1.53B at June 30; the company expects to recognize approximately 59% within 24 months and a further 29% in months 25–48.
- Goodwill was $512.9M, unchanged from year-end; the company reported no goodwill impairment for the first half.
Outlook, commentary and risks
The filing provides no specific numeric revenue, earnings or cash-flow guidance. Management expected subscription revenue to continue increasing as a share of revenue through the rest of 2023. It anticipated continued negative effects on professional services during 2023 until macroeconomic conditions and financial-industry conditions stabilize or improve. Efficiency measures begun in the second half of 2022 were expected to continue through 2023 and into 2024. The company also expects ongoing investment in product development, customer support, sales and infrastructure; these costs may rise in absolute dollars.
Management cited elevated uncertainty from rising interest rates, inflation, recession concerns and disruption in the banking sector following the failures of Silicon Valley Bank, Signature Bank and First Republic Bank. These conditions may affect customer spending, sales cycles, implementation timing and usage-based revenue from Helix and payment solutions. First Republic was a customer and accounted for approximately 2.5% of 2022 revenue, predominantly professional services. Other material risks include customer and bank consolidation, competition, implementation delays, cybersecurity and privacy incidents, reliance on third-party hosting and technology, regulatory change, and the ability to manage costs and growth.
Unusual items included $4.3M of first-half lease and other restructuring charges, comprising facility-exit costs and impairment as well as severance. No pending legal proceeding was reported as likely to have a material adverse effect. Management concluded disclosure controls were effective as of June 30, 2023.
Important facts for investors to verify
- Whether subscription growth and registered-user expansion continue, and whether declines in transactional and professional-services activity persist.
- Whether cash generation can support operations, contractual commitments and repayment or refinancing of the 2025 and 2026 Notes.
- How much reported improvement in net loss and adjusted EBITDA depends on noncash adjustments, stock-based compensation exclusions and the one-time debt-extinguishment gain.
- Whether the $1.53B of remaining performance obligations converts to revenue on the disclosed schedule; this measure is not equivalent to a revenue forecast.
- Whether restructuring and efficiency actions reduce costs without affecting customer service, implementation capacity or growth.