Business context and reporting period
Q2 Holdings, Inc. provides cloud-based digital banking, lending, leasing and banking-as-a-service solutions, primarily through subscriptions. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021; comparisons are to the same 2020 periods.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $123.6m | $97.6m | $240.1m | $190.0m |
| Gross profit / margin | $55.3m / 44.8% | $44.4m / 45.5% | $108.5m / 45.2% | $83.7m / 44.0% |
| Operating loss | $(19.9)m | $(32.3)m | $(37.5)m | $(59.5)m |
| Net loss | $(30.1)m | $(39.0)m | $(55.8)m | $(73.1)m |
| Diluted loss per share | $(0.53) | $(0.76) | $(0.99) | $(1.46) |
Revenue grew 26.6% in Q2 and 26.4% in the first half. Q2 subscription revenue was $89.2m, transactional revenue $17.7m and services and other revenue $16.7m. Management attributed growth primarily to additional solutions and registered-user growth, plus increased transaction volumes.
Six-month operating cash flow was $6.0m, versus cash used of $27.2m in 2020. Investing activities used $43.8m, including $64.7m for the ClickSWITCH acquisition, partly offset by investment maturities. Financing activities used $52.5m, primarily for convertible-note repurchases. Cash, cash equivalents and restricted cash ended the period at $320.9m.
At June 30, cash, cash equivalents and investments totaled $411.3m, versus $539.1m at December 31, 2020. Current assets were $495.4m and current liabilities $153.0m. Convertible notes had $677.2m aggregate principal outstanding and $537.9m net carrying value. Total liabilities were $786.1m. Operating lease liabilities were $74.1m; total scheduled lease payments were $77.1m.
Non-GAAP operating income was $6.6m for Q2 and $13.2m for the first half; adjusted EBITDA was $9.9m and $19.8m, respectively. These company-defined non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Material changes versus the prior comparable period
- Revenue growth reflected expansion among new and existing customers and higher transaction activity. Gross margin eased in Q2 year over year but improved for the six-month period.
- GAAP operating and net losses narrowed. The prior-year comparison included $13.2m of strategic partnership termination charges; 2021 included $0.8m of unoccupied-lease charges and a $1.5m loss on early debt extinguishment.
- Q2 acquired ClickSWITCH on April 1 for approximately $65.5m in cash, adding $50.6m of goodwill. Its results were included from the acquisition date; the company said the acquisition did not materially affect the financial statements.
- In May, Q2 repurchased $37.1m principal amount of 2023 notes for $63.7m and terminated related hedges and warrants, receiving approximately $6.6m net proceeds from those terminations.
Outlook, commentary, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management expects customer purchasing and implementation predictability to improve during the rest of 2021 compared with 2020, but says sales performance has been slower than it otherwise expected and the extent of improvement is uncertain. It anticipates continued COVID-19-related effects on bookings, revenue, gross margins and operating cash flows, alongside stronger digital usage and potential demand for digital services.
Management plans continued investment in sales, product development, customer support and technology infrastructure, and expects expenses to rise in absolute dollars. It expects longer-term operating leverage as revenue grows, but notes that investments may precede benefits. Most employees remained remote at filing; the company planned a formal facility reopening in fall 2021, subject to local conditions, with remote, hybrid or onsite options.
COVID-19 duration and effects, customer implementation delays, purchasing uncertainty, customer financial health and collections, and the timing of investment and hiring are cited uncertainties. The company also identifies potential foreign-currency and inflation exposure, though it describes current exposure as not significant or inflation as not materially affecting results. It reported no material legal proceedings, no material changes to its previously disclosed risk factors, and no off-balance-sheet arrangements. A $7.6m remaining strategic partnership termination payment was due in Q3 2021. Total contractual commitments were $851.7m, including convertible-note payments and interest, leases and purchase commitments.
Important facts for investors to verify
- Track revenue growth, subscription mix, gross margin and whether COVID-19-related delays ease as management expects.
- Assess the quality and sustainability of positive operating cash flow, including working-capital movements and deferred implementation and solution costs.
- Review debt principal, cash uses and potential conversion, dilution or cash-settlement exposure under the 2023, 2025 and 2026 notes and related hedges and warrants.
- Evaluate ClickSWITCH integration, acquisition-related costs, goodwill and intangible-asset estimates.
- Compare GAAP losses with non-GAAP measures and their exclusions, including substantial stock-based compensation.
- Monitor the $774.5m disclosed contractual commitments, including note, lease and purchase obligations, and the company’s ability to maintain liquidity.