Q2 Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Q2 provides cloud-based digital banking, lending, leasing and banking-as-a-service solutions, primarily through subscriptions to financial institutions and fintech providers. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $77.6 million | $58.6 million | $148.9 million | $113.4 million |
| Gross profit / margin | $37.6 million / 48.4% | $29.3 million / 50.0% | $71.7 million / 48.1% | $57.1 million / 50.4% |
| Operating loss | $(14.4) million | $(6.7) million | $(31.5) million | $(11.9) million |
| Net loss | $(17.3) million | $(8.6) million | $(36.6) million | $(14.7) million |
| Diluted loss per share | $(0.39) | $(0.20) | $(0.83) | $(0.35) |
| Adjusted EBITDA (non-GAAP) | $3.2 million | $5.1 million | $3.5 million | $10.1 million |
Q2 revenue rose 32.6% year over year; first-half revenue rose 31.4%. Q2 revenue included $54.1 million subscription, $12.2 million transactional, and $11.4 million services and other revenue. Management attributed growth principally to selling additional solutions and registered-user growth, with contributions from the 2018 acquisitions and increased transaction volumes.
Profitability weakened despite revenue growth: cost of revenue grew faster than revenue, reducing gross margin by 1.6 percentage points in Q2 and 2.3 points for the first half. Operating expenses increased, notably research and development (up 62.6% in Q2) and acquisition-related costs. Stock-based compensation was $9.6 million in Q2 and $18.5 million in the first half. Interest expense also increased following the 2026 notes issuance.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $582.9 million, investments were $34.8 million, and restricted cash was $2.2 million. Cash, cash equivalents and investments totaled $617.7 million, which management identified as principal liquidity.
- First-half operating cash use was $18.7 million, compared with $21.3 million in 2018. Investing activities provided $23.0 million, largely reflecting net investment maturities; capital expenditures were $10.9 million. Financing activities provided $470.5 million.
- Q2 issued $316.3 million principal amount of 0.75% convertible senior notes due 2026 and completed a common-stock offering. Net proceeds were approximately $266.2 million from the notes after offering costs and capped calls, and $195.2 million from the company’s share sale. The capped calls cost $40.8 million.
- Total note principal was approximately $546.3 million: $230.0 million due 2023 and $316.3 million due 2026. The balance-sheet carrying amount was $413.9 million, net of discounts and issuance costs. Both series carry a 0.75% coupon; accounting amortization of debt discounts contributes to reported interest expense. Notes are unsecured and may require cash repurchase after specified fundamental changes.
- Current assets were $669.9 million versus current liabilities of $99.7 million. The balance sheet also included $33.3 million of operating lease liabilities. Q2 adopted lease accounting in January 2019, recognizing right-of-use assets and lease liabilities.
Changes, outlook and risks
- Acquisitions of Cloud Lending and Gro, completed in late 2018, contributed $4.3 million to Q2 year-over-year revenue growth and increased personnel, amortization and integration-related expenses. Cloud Lending earnout fair value was $20.3 million at June 30; the first earnout milestone was not achieved, and the next measurement date is March 31, 2020.
- Registered Users reached 13.6 million at June 30, versus 11.4 million a year earlier. The filing reports an annual revenue-retention rate of 114% for 2018 and annual churn of 5.0%; these are historical annual measures, not Q2-specific metrics.
- No numerical full-year revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment and higher expenses in absolute dollars for sales and marketing, R&D, customer implementation and support, and infrastructure; it expects operating expenses to decline as a percentage of revenue over the long term and believes scale could improve margins. Management cautions that results can fluctuate with implementation timing, customer usage, hiring and investment.
- Key disclosed risks include persistent losses and uncertain path to profitability; execution and integration of acquisitions; competition and pricing pressure; customer implementation delays and retention; cybersecurity, service availability and reliance on third-party platforms and hosting; financial-sector regulation and privacy requirements; and potential dilution, cash demands or refinancing needs related to convertible notes. Management reported no material pending legal proceeding and said disclosure controls were effective at June 30; no material change in internal control over financial reporting was identified.
Most important facts for investors to verify
- Whether recurring revenue and registered-user growth can continue to outpace costs while gross margin and adjusted EBITDA recover.
- How much of reported growth reflects organic customer expansion versus acquired businesses, and whether Cloud Lending and Gro meet integration and earnout expectations.
- Cash burn, implementation-cost investment and the adequacy of the $617.7 million liquidity position against operating needs and contractual commitments.
- The economic and potential dilution effects of $546.3 million note principal, including conversion, capped-call coverage limits and future cash settlement obligations.
- Whether expense growth, particularly R&D, personnel and stock-based compensation, translates into durable revenue growth and operating leverage.