Q2 Holdings, Inc. — Q2 2017 Form 10-Q
Business and period: Q2 Holdings provides cloud-based digital banking solutions, primarily through SaaS subscriptions to regional and community financial institutions. This unaudited filing covers the quarter and six months ended June 30, 2017; comparisons are with the same 2016 periods. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $47.6 | $36.0 | $92.2 | $69.8 |
| Gross profit / margin | $23.3 / 48.9% | $17.1 / 47.6% | $45.1 / 48.9% | $33.1 / 47.4% |
| Operating loss | ($7.7) | ($9.6) | ($14.7) | ($19.1) |
| Net loss | ($7.8) | ($9.7) | ($14.9) | ($19.4) |
| Adjusted EBITDA (non-GAAP) | $1.4 | ($2.3) | $2.5 | ($4.7) |
- Revenue grew 32.3% in Q2 and 32.1% in the first half. Management attributed most growth to more registered users at existing customers and users added through newly installed customers; higher transaction volumes also contributed.
- Gross margin improved 1.3 percentage points in Q2 and 1.5 points in the first half. Operating loss narrowed, while GAAP net losses continued. Basic and diluted loss per share was $0.19 in Q2 and $0.36 for the first half, versus $0.25 and $0.49, respectively, in 2016.
- Stock-based compensation rose to $5.0 million in Q2 and $9.2 million for the first half, from $2.9 million and $5.5 million, respectively.
Cash flow, balance sheet and debt
- First-half operating cash use was $10.3 million, versus $2.4 million in 2016; investing cash use was $15.9 million, versus $9.8 million. Financing provided $5.8 million, primarily from stock-option exercises. Cash and cash equivalents declined $20.4 million to $34.5 million.
- At June 30, cash, cash equivalents and investments totaled $78.7 million; restricted cash was $2.9 million. Current assets were $112.2 million and current liabilities $52.0 million. Total assets were $193.4 million and total liabilities $93.1 million.
- The Wells Fargo credit facility expired April 11, 2017; the outstanding balance, less than $0.1 million, was repaid. A $1.6 million restricted deposit now secures the headquarters letter of credit.
- Contractual commitments totaled $83.5 million, including $48.8 million of operating lease obligations and $34.5 million of purchase commitments. Purchase commitments include variable usage obligations not quantified in the filing’s commitment table.
Changes, outlook and risks
- Operating expenses increased in dollars, notably research and development and general and administrative costs, but declined as a share of revenue. Management expects continued investment in sales, development, implementation, support and infrastructure; it anticipates expenses to rise in absolute dollars and margins to benefit over time from scale, though no quantified earnings or revenue guidance is provided.
- Management identified implementation timing and capacity, customer adoption and registered-user growth, transaction usage, and the timing of investment as drivers of variability. It cautioned that quarterly results may fluctuate and comparisons may not indicate future results.
- The company plans to adopt ASC 606 in Q1 2018 using the modified retrospective method. It was still assessing effects, particularly for contracts with periodic or usage-linked price increases and capitalization and amortization of contract acquisition costs. Adoption of the lease standard is expected to increase reported assets and liabilities.
- First-half acquisition-related cash outlays included $6.0 million paid to former Centrix shareholders for milestone achievements; a January 2017 asset purchase was recorded at $1.5 million. Acquisition-related expense fell from 2016 as prior acquisition milestone and retention costs declined.
- The company reported no material pending legal proceedings, no material changes to its previously disclosed risk factors, and effective disclosure controls as of June 30, 2017. It became a large accelerated filer in 2017, increasing compliance obligations.
Important facts for investors to verify
- Whether registered-user and transaction growth can sustain revenue growth and improve margins; the filing reports 9.6 million registered users at June 30, 2017, versus 7.6 million a year earlier.
- Whether operating cash use persists: first-half cash burn worsened despite narrower net losses, including cash outflows for accrued liabilities and deferred implementation and solution costs.
- The eventual ASC 606 effect on revenue timing and deferred contract costs, which management had not yet quantified.
- The scale and potential dilution of equity compensation: first-half stock-based compensation was $9.2 million, and 5.751 million potentially dilutive options and restricted stock units were excluded from diluted loss per share.
- Capacity to meet lease and purchase commitments, including variable usage-related purchase obligations, while continuing planned growth investments.