Q2 Holdings, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 16, 2018. Q2 provides cloud-based digital banking software and related services, primarily to regional and community financial institutions. The filing reports annual results and unaudited quarterly data, including the three months ended December 31, 2017.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $194.0 million | $150.2 million | +29.1% |
| Gross profit / margin | $94.5 million / 48.7% | $72.8 million / 48.5% | Margin +0.2 percentage points |
| Operating loss | $(26.9) million | $(35.7) million | Loss narrowed |
| Net loss | $(26.2) million | $(36.4) million | Loss narrowed |
| Adjusted EBITDA | $10.2 million | $(4.5) million | Turned positive |
| Operating cash flow | $9.5 million | $3.4 million | Increased |
| Cash, cash equivalents and investments at year-end | $99.6 million | $97.1 million | Increased |
| Total liabilities / stockholders’ equity | $106.2 million / $106.6 million | $100.7 million / $100.2 million | Both increased |
FY2017 revenue growth reflected a $38.9 million increase attributed to registered-user growth, retention, additional products and new customer implementations, plus $4.9 million from higher transaction volumes. Registered users rose to 10.4 million from 8.6 million. Installed platform customers declined to 382 from 385. Revenue retention was 122% in both years; annual churn improved to 4.9% from 5.1%.
For Q4 2017, revenue was $51.7 million, gross profit $25.1 million, operating loss $(6.3) million and net loss $(5.5) million. Q4 2016 revenue was $42.2 million and net loss was $(7.5) million.
Liquidity included $58.0 million cash and cash equivalents, $41.7 million investments and $2.3 million restricted cash. The company had no outstanding credit-facility balance at year-end; its Wells Fargo facility expired in April 2017 and the remaining balance, less than $0.1 million, was repaid. No material off-balance-sheet arrangements were reported. Contractual commitments totaled $98.7 million, comprising $46.6 million operating leases, $51.9 million purchase commitments and a $0.2 million acquisition holdback.
Changes versus the prior comparable period
- Revenue growth slowed to 29.1% in 2017 from 38.0% in 2016, while gross margin edged up to 48.7% from 48.5%.
- Operating and net losses narrowed, and adjusted EBITDA became positive. Management attributed improved operating results in part to revenue growth and lower acquisition-related costs, which fell to $1.2 million from $6.3 million.
- Operating cash flow increased to $9.5 million from $3.4 million. Cash and cash equivalents rose by $3.1 million during 2017, compared with a $12.2 million decrease in 2016.
- Research and development expense rose 24.3% to $40.3 million; stock-based compensation increased to $20.9 million from $12.6 million.
Outlook, risks and unusual items
- Management plans continued investment in sales, marketing, product development, customer support and infrastructure. It expects costs to rise in absolute dollars, while anticipating improved margins over the long term as revenue and scale grow. The company stated it expects losses for the foreseeable future; no specific revenue or earnings guidance is provided in the filing.
- Q2 introduced Q2 Open, an open-API financial-services offering, in June 2017. It also completed a $1.5 million asset purchase in January 2017.
- ASC 606 was scheduled for adoption in Q1 2018 using the modified retrospective method. The company estimated a $14–$16 million cumulative-effect adjustment to accumulated deficit, reflecting accelerated revenue and deferred expenses. The filing describes this as an expected adjustment; investors should distinguish it from amounts in the reported FY2017 financial statements.
- The Tax Cuts and Jobs Act resulted in a provisional $0.2 million tax benefit; the company said its analysis was ongoing. It reported $168.1 million of federal net operating loss carryforwards, subject to possible ownership-change limits.
- Principal risks include cybersecurity and service outages, dependence on third-party data centers and integrations, competition and pricing pressure, customer consolidation, lengthy implementations and sales cycles, regulatory and privacy obligations, and continued operating losses. The company relies primarily on two third-party data centers, both operated by the same provider.
- Management reported no pending legal proceedings expected to have a material adverse effect. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Reconcile the expected $14–$16 million ASC 606 adjustment with the opening balances and first 2018 quarterly disclosures, and assess the effects on revenue timing and contract-cost accounting.
- Track whether user growth, retention and transaction volumes continue to offset the decline in installed customers, and monitor churn and revenue retention definitions.
- Assess cash generation against continuing losses, capital spending, rising stock-based compensation and the $98.7 million of contractual commitments.
- Review customer concentration and exposure to financial-institution consolidation, third-party hosting, cybersecurity incidents and integration dependencies.
- Monitor whether Q2 can scale implementation and support efficiently while continuing substantial product-development investment; FY2017 adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP losses and cash flow.