Q2 Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions where applicable.
Business context
Q2 provides cloud-based digital banking, lending, and banking-as-a-service solutions to financial institutions, fintechs, alternative finance companies, and brands. Most customers use its subscription-based SaaS offerings. Q2 reported 20.9 million registered users at September 30, 2022, versus 19.2 million a year earlier; annualized recurring revenue was $633.7 million, versus $537.7 million.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $144.8M | $126.7M | $419.1M | $366.8M |
| Gross profit | $66.9M | $57.0M | $190.1M | $165.6M |
| Gross margin | 46.2% | 45.0% | 45.4% | 45.1% |
| Operating loss | $(27.1)M | $(23.0)M | $(72.3)M | $(60.4)M |
| Net loss | $(27.8)M | $(31.6)M | $(76.6)M | $(87.4)M |
| Adjusted EBITDA (non-GAAP) | $10.8M | $7.3M | $28.5M | $27.1M |
Q3 subscription revenue was $106.6 million, transactional revenue $15.9 million, and services and other revenue $22.2 million. For the quarter, revenue increased 14.2% year over year; subscription revenue grew while transactional revenue declined. Nine-month operating cash flow was negative $8.2 million, compared with negative $8.4 million a year earlier. Investing cash outflow was $125.5 million, primarily reflecting net investment purchases and $15.7 million of capitalized software development; financing cash inflow was $3.3 million.
At September 30, cash and cash equivalents were $192.6 million and investments were $203.1 million, for $395.7 million of stated principal liquidity. Total convertible-note principal was approximately $677.2 million; balance-sheet carrying value was approximately $668.0 million, including $10.9 million current and $657.1 million long-term. The 2023 Notes mature in February 2023. Q2 said its liquidity sources and operating cash flows were adequate for its expected cash requirements over the next 12 months.
Material changes and unusual items
- Revenue growth was 14.2% in Q3 and 14.3% for the first nine months. Management attributed growth mainly to additional solutions sold, registered-user growth, and higher debit-card pass-through fees.
- Q3 gross margin improved to 46.2% from 45.0%, but operating loss widened to $27.1 million from $23.0 million. Operating expenses rose, including restructuring charges of $5.5 million, versus $1.2 million a year earlier.
- Q2 adopted ASU 2020-06 on January 1, 2022, changing convertible-note accounting and reducing reported non-cash interest expense. This materially improved the year-over-year comparison of other expense and net loss; it did not affect cash flows.
- During Q3, Q2 exited Texas office space and recorded a $2.0 million right-of-use-asset impairment and $2.5 million of accrued exit-related costs. The filing also reports severance and other restructuring charges.
- Q2 acquired Sensibill on October 3, 2022, after quarter-end, for approximately $5.0 million in cash; purchase accounting was still in progress. The filing also reported a $0.7 million gain from settlement of an ordinary-course dispute in the first quarter.
Outlook, commentary, and risks
Q2 did not provide numerical revenue or earnings guidance in this filing. Management expects subscription revenue to grow faster in 2023 than it did in 2022, while anticipating continued pressure on professional services and transactional revenue into 2023 until macroeconomic conditions stabilize or improve. The company said it was managing expenses, with measures expected to continue into Q4 2022 and 2023, while also describing continued investment in product development, sales, implementation, support, and infrastructure.
Management cited inflation, rising interest rates, recession concerns, Russia’s invasion of Ukraine, hiring competition and wage inflation, and COVID-19-related uncertainty. These conditions could affect customer spending, implementation timing, and usage-based revenue; Q2 specifically observed lower demand for discretionary professional services and lower usage in Helix and payment solutions. Other key risks include competition, cybersecurity and service interruptions, customer implementation complexity, and the company’s debt obligations. Remaining performance obligations were $1.39 billion; Q2 expects to recognize about 48% within 24 months and a further 40% in months 25–48.
Q2 reported no legal proceedings expected to have a material adverse effect, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2022.
Investor verification checklist
- Assess whether subscription growth can offset continued weakness in transactional and professional-services revenue, and compare reported performance with management’s 2023 commentary.
- Review cash conversion and working-capital trends: operating cash flow remained negative for the first nine months despite the smaller outflow year over year.
- Verify debt maturities, conversion terms, and refinancing or repayment plans, particularly the $10.9 million of 2023 Notes due in February 2023 and the larger 2025 and 2026 obligations.
- Track the effect of restructuring and facility-exit costs, expense-management measures, and continued investment on GAAP operating losses and margins.
- Monitor investment portfolio values and unrealized losses, as well as the final purchase-price allocation and integration of the post-quarter Sensibill acquisition.