Q2 Holdings, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2016. Q2 Holdings provides cloud-based virtual banking solutions, primarily to regional and community financial institutions, mostly through SaaS subscriptions. Financial statements are unaudited; dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $36.0 | $26.3 | $69.8 | $50.4 |
| Gross profit / margin | $17.1 / 47.6% | $12.1 / 46.2% | $33.1 / 47.4% | $23.0 / 45.7% |
| Operating loss | $(9.6) | $(5.0) | $(19.1) | $(9.6) |
| Net loss | $(9.7) | $(5.0) | $(19.4) | $(9.6) |
| Net loss per share, basic and diluted | $(0.25) | $(0.13) | $(0.49) | $(0.26) |
| Adjusted EBITDA, non-GAAP | $(2.3) | $(2.0) | $(4.7) | $(4.1) |
Q2 revenue grew 37.0% year over year; first-half revenue grew 38.3%. Management attributed most of the increase to registered-user growth at existing customers and newly installed customers, with additional growth from transaction volume. Registered users reached 7.6 million at June 30, 2016, versus 5.7 million a year earlier.
- Margins and costs: Gross margin improved, but operating loss widened as operating expenses grew. First-half R&D expense rose 75.8% to $15.7 million, sales and marketing rose 35.2% to $17.8 million, and G&A rose 41.9% to $14.9 million.
- Cash flow: First-half operating cash flow was $(2.4) million, versus $0.3 million provided in the prior-year period. Investing cash use was $9.8 million and financing cash use was $2.3 million. Cash and cash equivalents decreased $14.5 million to $52.5 million.
- Liquidity and debt: Cash, cash equivalents and investments totaled $95.6 million at June 30. Current assets were $124.1 million and current liabilities $52.4 million. The company had no credit-facility borrowings, a $3.0 million secured letter of credit, and approximately $22.0 million of availability. The facility matures in April 2017; the company reported compliance with financial covenants.
- Balance sheet: Total assets were $200.2 million, total liabilities $93.4 million, and stockholders’ equity $106.9 million. Deferred revenue totaled $56.7 million.
Material changes and unusual items
- Acquisitions of Centrix and Social Money in 2015 added acquisition-related compensation and amortization costs. First-half acquisition-related costs were $3.0 million, including $2.8 million of milestone and retention compensation; acquired-intangible amortization was $0.7 million in operating expenses, with additional acquired-technology amortization included in cost of revenue.
- First-half property and equipment purchases were $8.7 million, compared with $2.3 million in the prior-year period. Capitalized software development costs were $1.2 million; the related products had not reached general release, so amortization had not begun.
- Operating lease obligations totaled $54.0 million and purchase commitments $30.4 million; a further $2.5 million acquisition holdback was listed. The filing also reports $86.96 million of total contractual obligations and commitments across categories.
- The company expects to become a large accelerated filer and cease qualifying as an emerging growth company on January 1, 2017, triggering additional disclosure and auditor-attestation requirements. Management anticipated increased G&A expense in the second half of 2016, including audit and Sarbanes-Oxley compliance costs.
Outlook, commentary and risks
No numeric revenue, earnings or cash-flow guidance is provided. Management expects continued investment in sales, R&D, implementation, customer support and technology infrastructure. It expects these costs to rise in absolute dollars, while operating expenses may decline as a percentage of revenue over the long term and scale may support improved margins. Management cautioned that implementation timing, customer readiness, investment timing and quarterly seasonality can make results volatile and period comparisons less predictive.
Key risks include continued operating losses and cash use; execution of customer implementations and realization of user growth; the ability to scale service and infrastructure efficiently; significant contractual lease and purchase obligations; and upcoming compliance costs associated with the change in filer status. The filing reports no legal proceedings expected to have a material adverse effect, no material change in internal control during the quarter, and effective disclosure controls as of June 30, 2016.
Important facts for investors to verify
- Whether registered-user and transaction growth continues to drive revenue and whether customer implementations proceed on schedule.
- Whether gross-margin improvement can be sustained as implementation, infrastructure and acquired-technology costs evolve.
- Drivers of widening GAAP losses and cash consumption, including stock-based compensation and acquisition-related compensation.
- Liquidity needs relative to operating cash use, lease and purchase commitments, and the April 2017 credit-facility maturity and covenants.
- Expected costs and execution risks of becoming a large accelerated filer, including auditor attestation and SOX compliance.