Q2 Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Q2 provides cloud-based digital banking, lending, leasing and banking-as-a-service solutions, primarily through subscriptions to financial institutions and financial technology providers.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $126.7 million | $103.8 million | $366.8 million | $293.8 million |
| Gross profit / margin | $57.0 million / 45.0% | $46.4 million / 44.7% | $165.6 million / 45.1% | $130.1 million / 44.3% |
| Operating loss | $23.0 million | $19.8 million | $60.4 million | $79.4 million |
| Net loss | $31.6 million | $26.7 million | $87.4 million | $99.8 million |
| Adjusted EBITDA (non-GAAP) | $7.3 million | $8.1 million | $27.1 million | $16.1 million |
Q3 revenue increased 22.1% year over year; nine-month revenue rose 24.9%. Management attributed growth principally to additional solutions and Registered Users among new and existing customers, and higher transaction volumes. Subscription revenue was $91.5 million in Q3, versus $74.5 million a year earlier. GAAP net loss per share was $0.56 for Q3 and $1.55 for the nine-month period.
Operating cash flow was negative $8.4 million for the nine months, compared with negative $22.0 million in 2020. Investing cash outflow was $53.8 million, including $64.7 million for the ClickSWITCH acquisition, partly offset by investment maturities. Financing cash outflow was $51.2 million, including $63.7 million to repurchase convertible notes. Cash, cash equivalents and restricted cash declined $113.4 million during the period.
At September 30, 2021, cash and cash equivalents were $294.8 million and investments were $99.8 million; management reported $394.6 million of cash, cash equivalents and investments as principal liquidity. Current assets were $504.1 million and current liabilities $163.9 million. Convertible notes had a net carrying value of $544.7 million; aggregate principal outstanding was approximately $677.2 million across the 2023, 2025 and 2026 notes. The company reported $836.3 million in total contractual obligations, including notes, leases and purchase commitments.
Changes and notable items
- Q3 gross margin improved 0.3 percentage points year over year; nine-month gross margin improved 0.8 points. Operating loss widened in Q3 but narrowed for the nine-month period, partly reflecting the $13.2 million partnership-termination charge recorded in 2020.
- Research and development expense rose 30.5% in Q3, while cost of revenue increased 21.5%; the company cited higher personnel, infrastructure, hosting and third-party costs. Stock-based compensation was $14.1 million in Q3 and $40.8 million year to date.
- Q2 acquired ClickSWITCH on April 1 for approximately $65.5 million in cash, recording $50.6 million of goodwill. The acquisition was not material to consolidated results, according to the filing.
- The company repurchased $37.1 million principal amount of 2023 notes for $63.7 million in May and recorded a $1.5 million extinguishment loss. Q3 included a $7.6 million cash payment related to the prior strategic-partnership termination; the associated $13.2 million charge had been recorded in 2020.
Outlook, commentary and risks
No specific numerical revenue, earnings or cash-flow guidance is provided. Management said the sales environment improved in Q3 relative to the first half of 2021 and expected continued improvement in purchasing and implementation predictability for the remainder of 2021, while noting the extent was uncertain. It expects continued investment in product development, customer support, sales and infrastructure, and anticipates operating expenses to rise in absolute dollars; longer-term margin improvement depends on growth and operating leverage.
Management believes liquidity is sufficient for the next 12 months. It also cautioned that COVID-19 effects remain unpredictable: purchasing decisions and implementations may be delayed, and pandemic-related labor shortages, wage inflation, supply constraints and reopening costs may pressure operations. Other disclosed exposures include customer credit and collection risks, competition for technical talent, potential inflationary cost pressures, and foreign-currency fluctuations. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Investor verification points
- Assess whether recurring subscription and Registered User growth can sustain revenue growth as implementation timing and transaction volumes fluctuate.
- Track operating cash flow, working-capital movements and liquidity after acquisition spending, note repurchases and contractual commitments.
- Review the convertible-note principal, conversion terms and potential dilution, as well as the expected 2022 accounting-standard adoption that management anticipates will reclassify amounts from equity to debt and reduce non-cash interest expense.
- Compare GAAP losses and margins with non-GAAP operating income and adjusted EBITDA, including the effects of stock-based compensation and other exclusions.
- Monitor ClickSWITCH integration and acquisition accounting, and the impact of ongoing technology, staffing and facility costs.