Q2 Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; amounts below are in U.S. dollars. Q2 provides cloud-based digital banking, lending, leasing and banking-as-a-service solutions, primarily through subscriptions to financial institutions and other financial-services providers. The results include PrecisionLender, acquired in October 2019.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $92.4 million | $71.3 million |
| Gross profit / gross margin | $39.3 million / 42.5% | $34.1 million / 47.8% |
| Operating loss | $27.2 million | $17.1 million |
| Net loss | $34.1 million | $19.3 million |
| Net loss per diluted share | $0.70 | $0.44 |
| Adjusted EBITDA (non-GAAP) | $(0.1) million | $0.3 million |
| Cash used in operating activities | $15.8 million | $10.9 million |
Cash, cash equivalents and investments totaled $112.8 million at March 31, 2020; restricted cash was a further $3.5 million. Current assets were $178.8 million and current liabilities $140.5 million. Convertible notes had $546.2 million principal outstanding and a $430.3 million net carrying amount. Management said available liquidity and operating cash flows were adequate for cash requirements over the next 12 months, taking expected COVID-19 impacts into account.
Revenue by source was subscription $66.2 million, transactional $12.8 million, and services and other $13.3 million. Remaining performance obligations were $1.2 billion; the company expected to recognize approximately 48% over the next 24 months.
Changes versus the prior-year quarter
- Revenue increased $21.1 million, or 29.6%. Management attributed $15.2 million of the increase to additional solutions and Registered User growth, $4.5 million to the acquired business, and $1.3 million to higher transaction volumes.
- Gross margin declined 5.3 percentage points to 42.5%. Cost of revenue grew 42.8%, faster than revenue, reflecting increased delivery and support staffing, acquired technology amortization, infrastructure and transaction-related costs.
- Operating loss widened by $10.1 million. Research and development rose 41.3%, sales and marketing 25.8%, and general and administrative expense 37.9%; acquired-asset amortization also increased.
- Net loss widened by $14.8 million, including higher interest expense from the two convertible-note offerings and increased non-cash debt-discount amortization. Stock-based compensation rose to $14.5 million from $8.9 million.
- Operating cash outflow increased to $15.8 million. Cash, cash equivalents and restricted cash declined $17.0 million during the quarter, versus a $2.2 million increase in Q1 2019.
Outlook, risks and unusual items
- Management did not provide quantified financial guidance. It expected COVID-19 to negatively affect 2020 revenue and gross margin, with delayed bookings—particularly for lending and leasing—and delayed customer implementations. Digital banking demand and usage could benefit as customers and end users shift online.
- The company reported that nearly all employees were working remotely and that it had continued customer operations. It noted, however, that unprecedented online-banking login activity in early April caused delayed access for many financial institutions, including some customers; Q2 said it was increasing platform capacity and infrastructure.
- COVID-19 effects on customers, collections, credit losses, purchasing decisions and operations remained highly uncertain. The company increased credit-loss reserves; at March 31, allowances were $0.4 million for accounts receivable and $0.3 million for contract assets. Management said the pandemic could adversely affect operating cash flow.
- Management planned to reduce 2020 hiring and focus hiring and investment mainly on essential support, delivery and infrastructure roles, while continuing strategic investment.
- The COVID-19-triggered goodwill and intangible-asset review found no impairment in Q1. Goodwill was $462.3 million. A future impairment remains possible if actual results or estimates deteriorate.
- Acquisition-related costs included a $3.1 million reduction in the estimated Cloud Lending earnout liability; the remaining estimated contingent consideration was $21.0 million and subject to final review. The filing also disclosed $10.7 million of unrecognized tax benefits, with $10.0 million potentially to be resolved within 12 months.
- Total contractual obligations were $709.1 million, including convertible notes and interest, lease obligations and purchase commitments. No material pending legal proceeding or off-balance-sheet arrangement was reported.
Important facts for investors to verify
- Whether COVID-19-related booking and implementation delays, customer payment requests, or defaults materially affect revenue, gross margin, credit reserves and cash generation.
- Whether elevated cost growth, stock-based compensation and acquired-intangible amortization persist, and how GAAP losses compare with non-GAAP measures.
- Liquidity relative to operating cash burn and the timing and terms of the $546.2 million convertible-note principal obligations, including potential conversion or repurchase requirements.
- PrecisionLender and other acquisitions’ contribution to growth, integration results, and the final Cloud Lending earnout calculation.
- Whether online-banking capacity and service levels keep pace with elevated usage, and whether customer retention, Registered User growth and remaining performance obligations convert into recognized revenue and cash.