Business context and reporting period
Q2 Holdings, Inc. provides cloud-based digital banking software primarily to regional and community financial institutions through a SaaS subscription model. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $50.1 | $38.3 | $142.3 | $108.1 |
| Gross profit | $24.3 | $18.7 | $69.4 | $51.8 |
| Gross margin | 48.5% | 48.8% | 48.8% | 47.9% |
| Operating loss | $(5.9) | $(9.3) | $(20.6) | $(28.4) |
| Net loss | $(5.8) | $(9.5) | $(20.6) | $(28.8) |
| Net loss per share, diluted | $(0.14) | $(0.24) | $(0.50) | $(0.73) |
| Adjusted EBITDA, non-GAAP | $3.6 | $(1.1) | $6.1 | $(5.8) |
- Revenue grew 30.8% in Q3 and 31.7% for the first nine months. Management attributed most of the growth to more registered users at existing customers and users added through newly installed customers; higher transaction volumes also contributed.
- At September 30, cash and cash equivalents were $40.1, investments were $48.7, and restricted cash was $2.9. Cash plus investments totaled $88.9. Total assets were $205.5; total liabilities were $102.8.
- Operating cash flow was $1.3 for the first nine months, compared with cash use of $1.4 in 2016. Investing activities used $24.5, financing activities provided $8.4, and cash and cash equivalents declined $14.7.
- The company had no outstanding credit-facility debt after repaying a balance of less than $0.1 when its facility expired in April 2017. A $1.6 restricted deposit now secures the headquarters letter of credit.
Material changes versus the prior comparable period
- Q3 operating loss narrowed to $5.9 from $9.3; nine-month operating loss narrowed to $20.6 from $28.4. Operating expenses grew more slowly than revenue, and acquisition-related costs fell substantially.
- Cost of revenue increased 31.7% in Q3, slightly faster than revenue growth, leaving quarterly gross margin down 0.3 percentage points. For the nine-month period, gross margin improved 0.9 percentage points.
- Stock-based compensation rose to $5.4 in Q3 from $3.4 and to $14.6 for the first nine months from $8.8. Management cited higher vesting and grant-date fair values, including the effect of the increased share price.
- Registered users reached 10.0 million at September 30, 2017, up from 7.8 million a year earlier.
Outlook, commentary, risks and contingencies
- No quantified revenue, profit or cash-flow guidance is provided. Management expects cost of revenue and operating expenses to rise in absolute dollars as it invests in implementation and support capacity, infrastructure, sales and marketing, and product development; it expects operating expenses to decline as a percentage of revenue over the long term.
- Management says implementation timing and customer readiness can create significant quarterly variability; unusually long or short implementations may affect results. The filing cautions that quarterly comparisons may not indicate future results.
- The company plans to adopt ASC 606 in Q1 2018 using the modified retrospective method. It expects potential effects from contractual price increases and usage-based increases, recognition of certain on-premises license revenue, and capitalization and amortization of additional contract acquisition costs; the impact was still being evaluated.
- At September 30, disclosed contractual obligations totaled $98.8, comprising $47.9 of operating lease obligations, $50.7 of purchase commitments and $0.2 of acquisition holdback. Purchase commitments include variable usage amounts not captured in the stated minimums.
- The company reported no material pending legal proceedings, no material change to previously disclosed risk factors, and no off-balance-sheet arrangements. It identified no material change in internal control over financial reporting and concluded disclosure controls were effective.
- Operating leases are expected to be recognized as right-of-use assets and lease liabilities upon adoption of the new lease standard, increasing reported assets and liabilities. The company also notes that inflation could raise costs that may not be fully offset by pricing.
Important facts for investors to verify
- Whether user and customer growth, transaction volumes and implementation capacity continue to support revenue growth.
- Whether gross margins and operating cash flow improve as the company scales, considering rising infrastructure costs and stock-based compensation.
- The quantified effects and implementation readiness for ASC 606, including revenue timing and contract-cost accounting.
- Liquidity and cash deployment against the $98.8 of disclosed contractual obligations, including variable purchase commitments.
- Progress toward profitability: the company remained GAAP-loss-making despite positive non-GAAP adjusted EBITDA in Q3 and for the nine-month period.