Q2 Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Q2 provides cloud-based digital banking, lending, leasing and banking-as-a-service solutions, primarily through subscriptions to financial institutions and fintech companies. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $71.3 million | $54.8 million |
| Gross profit / margin | $34.1 million / 47.8% | $27.8 million / 50.8% |
| Operating loss | $17.1 million | $5.2 million |
| Net loss | $19.3 million | $6.0 million |
| Net loss per share, diluted | $0.44 | $0.14 |
| Adjusted EBITDA | $0.3 million | $5.0 million |
| Cash used in operating activities | $10.9 million | $7.1 million |
Revenue comprised $50.1 million subscription, $11.5 million transactional, and $9.7 million services and other. At March 31, cash and cash equivalents were $110.5 million, investments were $54.0 million, and restricted cash was $1.8 million. Cash, cash equivalents and investments totaled $164.5 million. Current assets were $209.2 million and current liabilities $100.4 million.
Convertible notes had $230.0 million principal outstanding and a $185.3 million net carrying amount. The notes bear 0.75% stated interest, mature in February 2023, and were not convertible as of quarter-end. The company reported total liabilities of $338.0 million and stockholders’ equity of $152.4 million.
Material changes versus the prior-year quarter
- Revenue increased 30.1%, primarily from additional solutions and Registered User growth at new and existing customers (+$10.1 million), 2018 acquisitions (+$3.5 million), and increased transaction volumes (+$2.9 million). Registered Users were 13.1 million, versus 10.9 million a year earlier.
- Gross margin declined 3.0 percentage points to 47.8%. Cost of revenue rose 37.8%, faster than revenue, reflecting higher implementation and support staffing, transaction and third-party costs, infrastructure, and acquired technology amortization.
- Operating expenses increased to $51.3 million from $33.0 million. Research and development rose 58.3%; sales and marketing rose 44.1%. Acquisition-related costs were $2.7 million, including a $2.4 million increase in the estimated fair value of Cloud Lending contingent consideration.
- Net loss widened to $19.3 million from $6.0 million. Stock-based compensation was $8.9 million, compared with $6.1 million.
- Operating cash use increased to $10.9 million. Investing activities provided $9.7 million, mainly from investment maturities, while financing activities provided $3.4 million from stock-option exercises. The prior-year financing inflow included the convertible-note financing.
Outlook, commentary and risks
- The filing provides no quantified revenue, earnings, or cash-flow guidance. Management expects costs to increase in absolute dollars as it invests in sales, product development, implementation and support, and infrastructure; it expects operating leverage and improved margins over the longer term if growth continues.
- Management says quarterly results may fluctuate with sales and implementation timing, implementation capacity, customer readiness, and seasonality; first-quarter sales may be lower than in later quarters. Longer or shorter implementations, including for a small number of customers, can affect quarterly results.
- Remaining performance obligations were $893.2 million at quarter-end; the company expects to recognize approximately 49% within 24 months and another 40% in months 25–48. These are contracted revenue minimums, not a forecast of recognized revenue.
- Cloud Lending earnout consideration was estimated at $19.2 million at quarter-end, with up to $59.5 million potentially payable based on financial milestones. Its fair value depends on estimates and assumptions, and changes are recorded as acquisition-related costs.
- The company identifies risks including execution of growth and integration plans, investment and implementation costs, customer usage and retention, competition, and potential foreign-exchange effects. It reported no legal proceedings expected to have a material adverse effect and no material changes to the risk factors in its 2018 Form 10-K.
- Adoption of the new lease standard on January 1, 2019 added lease assets and liabilities; management said it did not affect the income statement or cash flows. At March 31, operating lease liabilities were $34.5 million. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Most important facts for investors to verify
- Whether revenue growth, Registered User expansion, and the $893.2 million remaining performance obligations convert into recognized revenue and cash on the expected schedule.
- Whether gross-margin pressure and the sharp increase in operating expenses moderate as management scales; review adjusted EBITDA alongside GAAP losses and operating cash flow.
- The assumptions behind the $19.2 million contingent-consideration estimate and possible Cloud Lending earnout payments, including the resulting effect on acquisition-related costs.
- Convertible-note terms, the February 2023 maturity, potential conversion and dilution mechanics, and the company’s ability to fund operations and contractual commitments.
- Cash consumption, capital spending, and the composition of the $331.3 million total contractual-obligations schedule, which includes notes and interest, leases, and purchase commitments.