Q2 Holdings, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; unaudited. Q2 provides cloud-based virtual banking software, primarily to regional and community financial institutions, chiefly through SaaS subscriptions.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $28.0 | $21.0 | $78.5 | $57.0 |
| Revenue growth | 33.5% | — | 37.7% | — |
| Gross profit / margin | $12.9 / 46.0% | $8.8 / 42.1% | $35.9 / 45.8% | $23.8 / 41.8% |
| Operating loss | $(7.0) | $(4.5) | $(16.5) | $(14.4) |
| Net loss | $(7.0) | $(4.6) | $(16.6) | $(14.9) |
| Net loss per share, diluted | $(0.19) | $(0.14) | $(0.45) | $(0.54) |
| Adjusted EBITDA loss | $(2.2) | $(2.3) | $(6.2) | $(8.2) |
Revenue and margins: Q3 revenue increased $7.0 million, mainly from growth in registered users at existing and newly installed customers ($6.3 million), with the remainder from higher transaction volumes. Nine-month growth also included increased non-recurring professional services revenue. Registered users were 6.0 million at September 30, versus 4.1 million a year earlier. Gross margin improved, while operating losses widened as operating expenses grew faster than revenue in Q3.
Costs: Nine-month research and development expense rose 72% to $14.9 million; sales and marketing rose 15.5% to $19.8 million; and general and administrative expense rose 33% to $16.4 million. Stock-based compensation was $4.9 million for the nine months, versus $3.1 million. Q3 also included $1.0 million of acquisition-related costs and $0.2 million of acquired-intangible amortization.
Cash flow and liquidity: For the first nine months, operating cash flow was $0.4 million, versus cash used of $4.3 million in 2014. The improvement included a $11.7 million increase in deferred revenue, partly offset by higher receivables and deferred implementation and solution costs. Investing activities used $46.6 million, including $18.6 million for Centrix net of cash acquired and net investment purchases. Financing activities provided $53.5 million, principally from equity offerings and option exercises. Cash and cash equivalents were $75.2 million at September 30, 2015; investments were $44.7 million.
Debt and commitments: No borrowings were outstanding under the credit facility; a $3.0 million letter of credit left approximately $22.0 million available. The facility allows up to $25.0 million, subject to borrowing limits and financial covenants; the company reported compliance with covenants. Contractual commitments totaled $80.6 million, including $50.2 million of operating lease obligations and $30.2 million of purchase commitments. These figures are commitments, not funded debt.
Material changes and unusual items
- Centrix acquisition: Completed July 31 for approximately $21.0 million in cash, including a working-capital adjustment. Sellers may receive up to a further $9.0 million tied to milestones and continued employment; such payments are treated as compensation when earned. Preliminary purchase accounting recorded $11.7 million of intangible assets and $8.8 million of goodwill.
- Equity financing: March and September follow-on offerings generated approximately $53.0 million in combined net proceeds for Q2 during the first nine months. The September offering generated about $20.3 million for Q2; most shares sold were from existing stockholders.
- Balance sheet: Total assets rose to $198.7 million from $136.8 million at year-end 2014, including acquired goodwill and intangibles, increased investments, and offering proceeds. Accumulated deficit was $81.0 million.
Outlook, commentary and risks
The filing provides no specific numerical revenue, earnings, or cash-flow guidance. Management expects continued investment in sales, research and development, implementation, customer support, and technology infrastructure. It anticipates expense growth in absolute dollars and believes scale and operating leverage could improve margins over the long term, but states that profitability is not expected for the foreseeable future. Results may fluctuate with implementation timing, customer readiness, hiring, and investment levels; first-quarter sales may be lower seasonally.
Key risks include managing rapid growth while maintaining service quality; long or complex implementations that may delay revenue recognition; cybersecurity, data privacy, uptime, and third-party integration risks; dependence on regulated financial-institution customers and a competitive market; and uncertainty around customer adoption, renewals, pricing, and profitability. The company also identified acquisition integration and purchase-accounting estimates as areas requiring judgment. No pending legal matter was reported as expected to have a material adverse effect. Management said disclosure controls were effective as of September 30, 2015.
Most important facts for investors to verify
- Whether registered-user and transaction growth translates into recurring revenue growth, and how current customer retention and churn compare with historical metrics.
- Whether improving gross margins and adjusted EBITDA losses persist as hiring, R&D, infrastructure, and customer-support costs rise; adjusted EBITDA is a non-GAAP measure.
- Centrix integration progress, final purchase-price allocation, acquired-asset performance, and potential milestone or retention compensation.
- Cash conversion, particularly the role of deferred revenue and continued increases in receivables and deferred customer-related costs.
- Credit-facility availability and covenant compliance, alongside substantial lease and purchase commitments and planned expansion of facilities.
- Potential dilution and share-price pressure from equity compensation, future share sales, and shares eligible for sale after the September offering lock-up.