Q2 Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are year over year unless noted. Q2 provides cloud-based digital banking, lending, leasing and banking-as-a-service solutions, primarily through subscriptions.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $116.5 million | $92.4 million | +26.1% |
| Gross profit / margin | $53.2 million / 45.7% | $39.3 million / 42.5% | Margin +3.2 points |
| Operating loss | $17.5 million | $27.2 million | Loss narrowed |
| Net loss | $25.7 million | $34.1 million | Loss narrowed |
| Loss per share, diluted | $0.46 | $0.70 | Improved |
| Adjusted EBITDA, non-GAAP | $9.9 million | $(0.1) million | Improved |
| Operating cash flow | $(5.5) million | $(15.8) million | Cash use declined |
Revenue comprised subscription fees of $85.1 million, transactional revenue of $16.3 million, and services and other revenue of $15.2 million. Management attributed growth mainly to additional solutions and Registered User growth, with further contribution from transaction volumes and Paycheck Protection Program solutions. Registered Users were 18.3 million at March 31, versus 15.4 million a year earlier.
Cost of revenue rose 19.2%, slower than revenue growth, supporting gross-margin expansion. Operating expenses were $70.7 million, up from $66.5 million; the prior-year comparison included a $3.1 million reduction in acquisition-related contingent consideration. Q1 2021 stock-based compensation was $13.1 million.
Liquidity, debt and commitments
At March 31, cash and cash equivalents were $370.7 million, investments were $157.9 million, and restricted cash was $3.5 million. Management reported $528.6 million of cash, cash equivalents and investments and said available liquidity and operating cash flows were expected to cover requirements for the next 12 months.
Convertible notes had an aggregate principal amount of approximately $714.3 million; their net carrying value was $564.5 million after unamortized discounts and issuance costs. Q1 interest and other expense was $8.2 million. The 2023 notes were convertible at holders’ option for Q2 2021; the 2025 and 2026 notes were not convertible as of quarter-end. Lease liabilities totaled $41.7 million on the balance sheet; disclosed future lease payments were $79.5 million, and additional payments of approximately $31.6 million relate to a lease not yet commenced. Contractual commitments totaled $807.0 million in the note disclosure, including note, product and other commitments.
Investing cash outflow was $33.5 million, primarily reflecting net investment purchases, $6.1 million of property and equipment purchases, and $0.8 million of capitalized software costs. Financing cash inflow was $2.0 million from stock-option exercises.
Changes, outlook and notable items
- Revenue increased 26.1% year over year; GAAP net loss narrowed to $25.7 million. Operating cash use also declined, though it remained negative.
- Management expects 2021 sales and bookings to remain below what it believes would have occurred without COVID-19, while anticipating gradually improving booking predictability and cross-selling opportunities. It cautioned that the pandemic could continue to delay purchases, implementations and revenue recognition, and adversely affect bookings, revenue, gross margins and operating cash flow. No specific revenue or earnings guidance was provided.
- Management expects continued investment in hiring, product development, customer support and infrastructure. It anticipates operating expenses rising in absolute dollars, with potential longer-term margin benefits from scale; hiring and some operating costs were expected to increase during 2021.
- Q2 completed its acquisition of ClickSWITCH on April 1, after quarter-end, for approximately $65 million in cash. Purchase accounting was still being finalized.
- A $7.6 million remaining payment related to a 2020 strategic-partnership termination was expected in Q3 2021. A long-term stadium sponsorship agreement runs from 2021 through 2028.
- Management reported no material legal proceedings or material changes to the risk factors in its 2020 Form 10-K. COVID-19 effects, implementation timing, customer demand and collection conditions remain uncertainties.
Investor facts to verify
- Track whether revenue growth converts into improved GAAP profitability and sustained positive operating cash flow.
- Review the drivers and durability of gross-margin improvement, including infrastructure and implementation costs.
- Monitor customer bookings, implementation delays, Registered User growth, retention and churn as pandemic-related conditions evolve.
- Assess convertible-note conversion and dilution exposure, particularly the 2023 notes’ near-term conversion eligibility, and debt-related interest expense.
- Confirm ClickSWITCH purchase-price allocation and cash impact, and monitor the remaining partnership termination payment and long-term contractual commitments.
- Interpret adjusted EBITDA alongside GAAP results; it excludes items including stock-based compensation, acquired-intangible amortization and acquisition-related costs.