Q2 Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless noted. Amounts are in U.S. dollars. Q2 provides primarily cloud-based digital banking software and related services to regional and community financial institutions, mostly through a SaaS subscription model.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Revenue | $44.5 million | $33.8 million | Up 31.9%; management attributed most growth to registered-user additions, with the remainder primarily from higher transaction volumes. |
| Gross profit / margin | $21.8 million / 48.9% | $15.9 million / 47.2% | Margin improved 1.7 percentage points. |
| Operating loss / margin | $6.9 million / (15.6%) | $9.4 million / (28.0%) | Loss narrowed. |
| Net loss / diluted loss per share | $7.0 million / $0.17 | $9.7 million / $0.25 | Loss narrowed; weighted-average shares were 40.6 million versus 39.0 million. |
| Adjusted EBITDA | $1.1 million | $(2.4) million | Non-GAAP measure; see filing reconciliation and limitations. |
| Operating cash flow | $(10.7) million | $0.2 million | Cash use increased, chiefly reflecting working-capital movements, including lower accrued liabilities and deferred revenue. |
| Investing / financing cash flow | $(4.4) million / $3.0 million | $(10.5) million / $(1.5) million | Q1 2017 financing inflow was primarily from stock-option exercises. |
Stock-based compensation rose to $4.2 million from $2.6 million. Total operating expenses increased 13.1% in dollars, but declined to 64.4% of revenue from 75.2%; lower acquisition-related costs contributed to the improvement. Gross margin gains reflected revenue growth outpacing cost-of-revenue growth.
At March 31, 2017, cash and cash equivalents were $42.8 million and investments were $39.4 million, totaling $82.2 million; restricted cash was $1.3 million. Total assets were $191.6 million, total liabilities $91.2 million, and stockholders’ equity $100.4 million. Q2 reported no borrowings outstanding under its credit facility at quarter-end, with approximately $22.0 million available, subject to facility terms and covenants. The facility expired April 11, 2017; Q2 subsequently paid the remaining balance, less than $0.1 million, and secured the $3.0 million letter of credit with a restricted deposit.
Contractual commitments totaled $87.4 million, including operating leases, purchase commitments and an acquisition holdback. The company reported compliance with its credit-facility covenants at March 31 and no material off-balance-sheet arrangements.
Material changes and operating indicators
- Revenue increased $10.8 million year over year, primarily from registered-user growth at existing and newly installed customers ($9.7 million) and increased transaction volume (approximately $1.1 million).
- Cost of revenue rose 27.8%, below revenue growth, with higher personnel, third-party processing and intellectual-property costs, data-center costs and allocated overhead.
- Sales and marketing, research and development, and general and administrative expenses increased in dollars, mainly from personnel and related costs. Acquisition-related costs fell to $0.3 million from $1.5 million.
- Registered users were 8.9 million at March 31, 2017, versus 6.8 million a year earlier. Installed customers were 385 at December 31, 2016; the filing does not provide a March 31, 2017 installed-customer count.
- The 2016 revenue retention rate was 122%, and 2016 annual churn was 5.1%; these are annual measures, not Q1 results.
Outlook, risks and unusual items
- No specific numerical revenue, earnings or cash-flow guidance is provided. Management expects continued investment and increases in cost of revenue and operating expenses in absolute dollars. It expects potential long-term margin improvement as revenue scales and investments produce efficiencies.
- Management cautions that quarterly results can vary with customer implementation timing, implementation capacity, customer readiness and the timing of sales. Delayed or unusually short implementations may affect results.
- Growth depends partly on existing customers adding registered users and solutions, and on account holders choosing to register. Management notes it does not control that registration decision.
- The company identifies execution and investment risks, including scaling implementation, support and data-center capacity while maintaining service quality, and ongoing product-development and public-company compliance costs. Management reported no material changes to the risk factors in its 2016 Form 10-K.
- In Q1, Q2 paid $6.0 million to former Centrix shareholders for milestone achievements; the payment contributed to the decline in accrued liabilities and operating cash flow. A January 2017 asset purchase was accounted for as an asset acquisition, with $1.5 million allocated to intangible assets and amortized over three years.
- Q2 adopted the employee share-based payment accounting update effective January 1, 2017, recording a $0.2 million cumulative-effect adjustment to retained earnings. It plans to adopt the new revenue standard in Q1 2018 using the modified retrospective method and is still evaluating its effects.
- Management reported effective disclosure controls as of March 31, 2017, with no material change in internal control over financial reporting during the quarter. It reported no legal proceedings expected to have a material adverse effect.
Investor verification priorities
- Reconcile revenue growth and registered-user additions with customer implementation timing, transaction usage and future retention.
- Assess cash conversion: operating cash flow was negative $10.7 million despite a narrower GAAP net loss and positive adjusted EBITDA; review working-capital movements and recurring investment needs.
- Verify post-quarter liquidity and the status of the expired credit facility, including the restricted deposit supporting the letter of credit.
- Track the effect of higher stock-based compensation, hiring and infrastructure spending on margins, dilution and cash needs.
- Review the $87.4 million of contractual commitments, the acquisition holdback and the potential effects of adopting the new revenue and lease accounting standards.