Q2 Holdings, Inc. — Q2 2018 Form 10-Q
Business context and period. Q2 Holdings provides cloud-based digital banking software, primarily to regional and community financial institutions through SaaS subscriptions. This filing covers the quarter and six months ended June 30, 2018; financial statements are unaudited. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $58.6 | $47.6 | $113.4 | $92.2 |
| Gross profit / margin | $29.3 / 50.0% | $23.3 / 48.9% | $57.1 / 50.4% | $45.1 / 48.9% |
| Operating loss | $(6.7) | $(7.7) | $(11.9) | $(14.7) |
| Net loss | $(8.6) | $(7.8) | $(14.7) | $(14.9) |
| Net loss per diluted share | $(0.20) | $(0.19) | $(0.35) | $(0.36) |
| Adjusted EBITDA (non-GAAP) | $5.1 | $1.4 | $10.1 | $2.5 |
- Revenue mix, Q2 2018: subscriptions $41.2 million, transactional $8.9 million, and services and other $8.5 million.
- Revenue rose 23% year over year in both the quarter and first half. Management attributed growth mainly to more registered users at existing and newly installed customers, plus higher transaction volumes. Registered users reached 11.4 million at June 30, versus 9.6 million a year earlier.
- For the first half, operating cash flow was $(21.3) million, compared with $(10.3) million in 2017. Investing cash flow was $(71.6) million, including $74.4 million of investment purchases and $11.2 million of property and equipment purchases. Financing cash flow was $211.7 million, primarily from the convertible-note financing.
- At June 30, cash and cash equivalents were $176.7 million, investments were $102.0 million, and restricted cash was $2.3 million. The company reported $278.7 million of cash, cash equivalents and investments as its principal liquidity sources.
- Q2 reported current assets of $327.4 million and current liabilities of $54.6 million. Total liabilities were $260.5 million and stockholders’ equity was $158.3 million.
- In February 2018, the company issued $230 million of 0.75% convertible senior notes due February 2023. The balance-sheet carrying amount was $177.6 million after unamortized discount and issuance costs. The company also paid $41.7 million for bond hedges and received $22.4 million from warrant sales.
Material changes versus the prior comparable period
- Gross margin improved by 1.1 percentage points in Q2 and 1.5 points for the first half. Operating losses narrowed, while Q2 net loss increased, principally reflecting $2.9 million of net other expense related mainly to the new notes; the prior-year quarter had net other income.
- Operating expenses increased in dollars, including research and development and general and administrative costs, but declined as a percentage of revenue. Stock-based compensation rose to $13.1 million in the first half from $9.2 million.
- Adoption of the new revenue standard (ASC 606) increased reported revenue by $1.6 million in Q2 and $3.9 million in the first half, and improved reported net income by $1.7 million and $4.3 million, respectively, versus balances calculated without the standard. Prior periods were not restated. Adoption also increased opening accumulated deficit by $15.8 million.
- Operating cash use increased, with cash-flow discussion citing higher receivables, deferred costs, and lower deferred revenue among the drivers.
Outlook, commentary, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in sales, product development, implementation and support, and infrastructure; it anticipates costs rising in absolute dollars and expects longer-term operating leverage as revenue grows. Results may vary with customer implementation timing and capacity.
- Remaining performance obligations were $764.6 million at June 30; the company expected to recognize approximately 53% over the next 24 months and a further 39% in months 25–48. These are contracted revenue minimums, not a guarantee of future results.
- The company recorded a $0.7 million charge after vacating part of a south Austin office. It reported no pending legal proceeding expected to have a material adverse effect and no off-balance-sheet arrangements.
- On August 6, 2018, after quarter-end, Q2 agreed to acquire Cloud Lending for $105 million at closing, subject to customary adjustments, plus potential additional performance-based consideration. Closing was expected in Q4 2018 and remained subject to conditions.
- Key risks include execution of growth and customer implementations, rising operating costs, and the possibility that operating cash generation may not be sufficient to meet future needs. The notes may require cash settlement upon certain conversions or repurchase events; the warrants may dilute shareholders if the share price exceeds their $78.75 exercise price. Management also expects adoption of the lease standard to increase reported assets and liabilities.
Important facts for investors to verify
- Assess revenue growth and margins excluding the impact of ASC 606, and track implementation capacity, registered-user growth, retention and customer churn.
- Monitor operating cash use, receivable collections, deferred revenue and capital expenditure needs alongside non-GAAP adjusted EBITDA.
- Review the convertible notes’ conversion and repurchase provisions, debt carrying value and interest expense, and the potential dilution or share-price effects of the hedges and warrants.
- Confirm the Cloud Lending acquisition’s closing, final consideration, performance conditions and funding implications.
- Consider stock-based compensation and other adjustments when evaluating adjusted EBITDA; the filing cautions that this non-GAAP measure is not a substitute for GAAP results or operating cash flow.