Q2 Holdings, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited financial figures below are in millions of dollars unless stated otherwise. Q2 provides cloud-based virtual banking software, primarily to regional and community financial institutions, under subscription agreements.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $20.989 | $14.325 | $56.981 | $41.203 |
| Gross profit / margin | $8.846 / 42.1% | $5.158 / 36.0% | $23.796 / 41.8% | $15.821 / 38.4% |
| Operating loss | $(4.525) | $(4.995) | $(14.415) | $(10.807) |
| Net loss | $(4.625) | $(5.179) | $(14.874) | $(11.376) |
| Adjusted EBITDA | $(2.332) | $(3.686) | $(8.206) | $(7.378) |
| Basic and diluted loss per share | $(0.14) | $(0.43) | $(0.54) | $(0.96) |
- Revenue grew 46.5% year over year in Q3 and 38.3% for the first nine months. Management attributed the increases principally to more registered users, including at existing customers and newly installed customers, and higher transaction volumes. Registered users rose to 4.1 million from 3.0 million a year earlier.
- Q3 gross margin improved 6.1 percentage points; nine-month gross margin improved 3.4 points. Cost of revenue rose more slowly than revenue, while personnel, transaction-processing, data-center and infrastructure costs increased.
- Operating expenses were $13.371 million in Q3 and $38.211 million for the nine-month period. Stock-based compensation was $1.101 million and $3.087 million, respectively, up from $0.412 million and $1.122 million in the comparable periods.
- Operating cash flow was negative $4.258 million for the first nine months, compared with negative $0.201 million in 2013. Investing cash outflow was $22.600 million, including $18.072 million of investment purchases and $3.815 million of property and equipment purchases.
Balance sheet, liquidity and financing
- At September 30, 2014, cash and cash equivalents were $72.340 million and investments were $18.028 million, totaling $90.368 million. Current assets were $106.384 million and current liabilities were $28.214 million.
- Long-term debt was $0.046 million; capital lease obligations totaled $0.712 million. The Wells Fargo credit facility had approximately $22 million available, after accounting for borrowings and a $3 million letter of credit; the company reported covenant compliance.
- Q2 received approximately $86.3 million in net IPO proceeds in March and April. It repaid approximately $6.2 million of credit-facility debt with IPO proceeds. Financing cash flow was $80.523 million for the first nine months.
- Deferred revenue was $36.647 million, including current and long-term portions. The company reported $47.846 million in total contractual obligations and commitments, including operating and capital leases and purchase commitments.
Outlook, commentary and notable items
- Management expects to continue investing in sales, marketing, research and development, implementation and support capacity, and technology infrastructure. It anticipates these costs will increase in absolute dollars and expects potential margin improvement over the long term as revenue growth and scale create operating leverage.
- Q2 stated it expects losses for the foreseeable future and cannot predict when it will achieve or sustain profitability. It gave no specific revenue, earnings or cash-flow guidance in the supplied filing text.
- Management cautioned that results may fluctuate with implementation timing, customer readiness, sales cycles, usage and investment levels; quarterly comparisons may not indicate future results. The company also noted that sales may be lower in the first quarter.
- A July 2014 lease for approximately 70,000 square feet of additional Austin office space is expected to commence in phases beginning in November 2015, subject to construction. The 124-month lease has monthly rent beginning at approximately $98,000 and escalating to approximately $160,000 near the end of its term.
- Preferred and redeemable common shares converted to common stock in connection with the IPO. The company reported an accumulated deficit of $59.606 million. Its full valuation allowance against deferred tax assets remained in place.
- Material risks highlighted include managing rapid growth and maintaining service quality; cybersecurity, data privacy and system availability; dependence on financial-institution customers and third-party integrations/data centers; competition and pricing pressure; implementation delays; continued operating losses; and potential dilution or stock-price pressure from shares becoming eligible for sale.
- Q2 reported no legal proceedings expected to have a material adverse effect, no off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2014. The company was an emerging growth company and had elected not to use the extended transition period for new accounting standards.
Investor verification points
- Track whether registered-user and transaction growth continues to drive revenue, and whether implementation timing or customer concentration changes that trajectory.
- Assess the quality and durability of gross-margin improvement against rising infrastructure, support, personnel and stock-based compensation costs.
- Monitor operating cash use, deferred implementation and solution costs, and the conversion of deferred revenue into recognized revenue and cash collections.
- Review liquidity and credit-facility availability alongside the new office lease and other contractual commitments.
- Verify future profitability claims against GAAP losses and cash flow; adjusted EBITDA is a non-GAAP measure and does not capture all cash requirements.
- Monitor cybersecurity, uptime, regulatory compliance, third-party dependencies, and the potential effect of newly eligible shares on ownership dilution and trading.