Q2 Holdings, Inc. — Q1 2018 Form 10-Q
Business and period: Q2 provides cloud-based digital banking software, primarily to regional and community financial institutions through a SaaS model. This unaudited filing covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Amounts below are in millions of dollars except per-share data and percentages.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Revenue | $54.8 | $44.5 |
| Gross profit / margin | $27.8 / 50.8% | $21.8 / 48.9% |
| Operating loss | $(5.2) | $(6.9) |
| Net loss | $(6.0); $(0.14) per diluted share | $(7.0); $(0.17) per diluted share |
| Adjusted EBITDA (non-GAAP) | $5.0 | $1.1 |
| Operating cash flow | $(7.1) | $(10.7) |
| Cash, cash equivalents and investments | $294.1 at March 31, 2018 | $99.6 at December 31, 2017 |
| Total assets / liabilities | $421.9 / $267.0 at March 31, 2018 | $212.8 / $106.2 at December 31, 2017 |
Revenue comprised subscription $38.2 million, transactional $8.6 million, and services and other $8.0 million. Cash and cash equivalents were $255.4 million, with $2.3 million of restricted cash; investments were $38.7 million. Current assets of $330.5 million exceeded current liabilities of $61.8 million.
Q1 investing cash use was $2.6 million, including $5.4 million of property and equipment purchases, partly offset by investment maturities. Financing provided $207.2 million, principally from the February convertible-note offering, related warrant proceeds, and bond-hedge purchase. Cash, cash equivalents and restricted cash increased $197.5 million during the quarter.
Changes versus comparable period
- Reported revenue rose 23.1%; management attributed $8.7 million of growth primarily to registered-user growth and newly installed customers, and $1.6 million primarily to higher transaction volume.
- Gross margin improved 1.9 percentage points, while operating loss narrowed by $1.7 million and net loss narrowed by $1.0 million. Adjusted EBITDA increased $3.9 million.
- Operating expenses increased in dollars: sales and marketing by 11.0%, research and development by 15.6%, and general and administrative by 21.8%. Each declined or was broadly stable as a percentage of revenue.
- Q1 2018 revenue includes a $2.3 million benefit from adopting the new revenue standard. Without the standard, Q1 2018 revenue would have been $52.5 million and net loss $8.7 million; the filing does not restate Q1 2017 under the new standard, limiting direct comparability.
Outlook, commentary and risks
- No specific numerical revenue or earnings guidance is provided. Management expects cost of revenue and operating expenses to rise in absolute dollars as the company invests in implementation, customer support, infrastructure, sales and product development. It expects operating expenses to decline as a percentage of revenue over the long term and believes growth and operating leverage may improve margins over time.
- At March 31, remaining performance obligations were $756.1 million; the company expects to recognize approximately 52% in the next 24 months and another 36% in months 25–48. These are contracted revenue minimums, not reported revenue or a guarantee of realization.
- Registered users were 10.9 million at March 31, 2018, versus 8.9 million a year earlier. Reported annual revenue retention was 122% and annual churn was 4.9% for 2017; these company-defined metrics have limitations and may not be comparable with peers.
- In February, Q2 issued $230.0 million principal amount of 0.75% convertible senior notes due February 2023. The balance-sheet carrying amount was $175.2 million after discounts and issuance costs. The notes have an initial conversion price of $57.38 per share. Q2 paid $41.7 million for bond hedges and received $22.4 million from warrants with a $78.75 strike price. Debt discount and issuance-cost amortization contributed to $1.2 million of Q1 interest and other expense.
- The company identifies risks from debt repayment and possible cash settlement upon conversion, potential warrant dilution, customer implementation timing and capacity, customer attrition and mergers, and its ability to sustain growth while investing. Results can be seasonal and fluctuate between quarters.
- Adoption of the revenue standard on January 1, 2018 increased opening accumulated equity by $15.8 million. The company said it was still finalizing certain provisional Tax Act calculations. It anticipated that lease-accounting adoption would increase reported assets and liabilities.
- Management reported no pending legal matter expected to have a material adverse effect, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2018. The filing provides no formal full-year outlook.
Important facts for investors to verify
- Assess growth and margins on a comparable basis, accounting for the $2.3 million Q1 revenue-standard benefit and the un-restated prior-year results.
- Track recurring revenue growth, registered-user adoption, retention and churn, while considering implementation timing and customer concentration; no customer represented 10% or more of revenue.
- Monitor operating cash burn and investment needs against the $294.1 million cash-and-investments position, and distinguish cash proceeds from the note issuance from underlying operating cash generation.
- Review the notes’ conversion, repurchase and settlement terms, the bond-hedge and warrant effects, and the related noncash interest expense and potential dilution.
- Verify realization and timing of the $756.1 million remaining performance obligations, and follow completion of the Tax Act analysis and expected lease-accounting balance-sheet changes.