Q2 Holdings, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Q2 provides cloud-based digital banking, lending and banking-as-a-service solutions, primarily to financial institutions, FinTechs and brands. This unaudited report covers the three months ended March 31, 2023, compared with the same quarter of 2022. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $153.0 | $134.1 |
| Gross profit / margin | $73.3 / 47.9% | $60.4 / 45.1% |
| Operating loss | $(21.2) | $(21.4) |
| Net loss | $(0.5) | $(23.6) |
| Adjusted EBITDA (non-GAAP) | $16.5 | $8.1 |
| Cash provided by (used in) operations | $3.9 | $(4.5) |
Revenue rose 14.1% year over year. Subscription revenue was $115.2 million, up from $96.6 million; transactional revenue was $16.3 million, down from $17.0 million; and services and other revenue was $21.6 million, up from $20.4 million. Management attributed growth mainly to additional solutions sold and more registered users. Subscription revenue grew 19% year over year.
Q1 net loss was near break-even partly because Q2 recorded a $19.9 million gain on early extinguishment of debt. The company still reported an operating loss. Non-GAAP operating income was $10.1 million, versus $3.3 million a year earlier; these non-GAAP measures exclude specified costs and should be considered alongside GAAP results.
At March 31, 2023, cash and cash equivalents were $121.3 million and investments were $150.5 million; together, these totaled $271.7 million. Operating cash flow was positive, while cash, cash equivalents and restricted cash declined by $78.4 million during the quarter, mainly reflecting debt repayments and repurchases. Total assets were $1.18 billion and total liabilities were $745.3 million.
Q2 repaid the remaining $10.9 million of its 2023 Notes at maturity and repurchased $12.3 million principal of 2026 Notes and $159.0 million principal of 2025 Notes. At quarter-end, principal outstanding was $304.0 million on the 2026 Notes and $191.0 million on the 2025 Notes, both convertible notes. Their combined net carrying amount was $489.0 million. The notes bear fixed annual interest of 0.75% and 0.125%, respectively.
Material changes and operating indicators
- Gross margin improved to 47.9% from 45.1%, as revenue growth exceeded the 8.2% increase in cost of revenue.
- Operating expenses increased to $94.5 million from $81.8 million. General and administrative expense rose 20.1%; lease and other restructuring charges increased to $2.0 million from $0.4 million.
- ARR was $672.7 million at March 31, 2023, compared with $594.2 million a year earlier. Registered Users were 21.5 million, versus 19.7 million.
- Remaining performance obligations were $1.53 billion; the company expects to recognize approximately 58% within 24 months and another 30% in months 25–48.
Outlook, risks and unusual items
No numeric revenue or earnings guidance is provided in the filing. Management expects subscription revenue to comprise a growing share of revenue during 2023, but anticipates continued negative effects on professional services in 2023 until macroeconomic and financial-industry conditions stabilize or improve. Efficiency measures begun in the second half of 2022 are expected to continue through 2023 and into 2024. Management also expects continued investment and higher expenses in absolute dollars, with longer-term margin improvement dependent on growth and operating leverage.
Management cites uncertainty following bank failures, including Silicon Valley Bank, Signature Bank and First Republic Bank, as well as rising interest rates, inflation and potential economic slowdown. These conditions may affect customer spending, sales cycles, lending activity and usage-based revenue. First Republic Bank accounted for approximately 2.5% of Q2’s 2022 revenue, predominantly professional-services revenue. Management also notes reduced Helix and payment-solution usage and weaker demand for discretionary professional services.
Unusual items include the $19.9 million debt-extinguishment gain and $2.0 million of lease and other restructuring charges. The company disclosed $607.2 million of future minimum contractual commitments; variable usage-based amounts are excluded. It reported no legal proceedings expected to have a material adverse effect, but noted it is under examination by the State of Texas and had $1.0 million in uncertain tax positions. Management believes available liquidity and operating cash flows are adequate for the next 12 months. The filing also identifies cybersecurity, third-party service, implementation, competition, customer concentration in financial services, and debt repayment risks.
Important facts for investors to verify
- How much of reported near-break-even net loss reflects the one-time debt-extinguishment gain, and how should GAAP operating loss be weighed against adjusted EBITDA?
- Whether subscription growth and ARR expansion continue, and whether lower transactional usage and professional-services demand persist.
- The effect of financial-sector stress on regional and community financial institution customers, including any developments involving First Republic Bank.
- Cash generation after debt repurchases, and the company’s capacity to meet 2025 and 2026 note maturities and other contractual commitments.
- Whether restructuring and efficiency measures reduce expense growth without impairing service, implementation capacity or customer retention.