Q2 Holdings, Inc. — Q1 2014 Form 10-Q
Business and period: Q2 provides cloud-based virtual banking software and related implementation and support services primarily to regional and community financial institutions. This filing reports the three months ended March 31, 2014, compared with Q1 2013; balance-sheet comparisons are to December 31, 2013. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior year-end |
|---|---|---|
| Revenue | $16.8 | $12.8 |
| Gross profit / margin | $6.6 / 39.3% | $5.0 / 39.2% |
| Operating expenses | $12.0 | $7.3 |
| Operating loss | $(5.3) | $(2.2) |
| Net loss | $(5.6) | $(2.5), including discontinued operations |
| Net loss per share, basic and diluted | $(0.39) | $(0.22) |
| Adjusted EBITDA, non-GAAP | $(3.4) | $(1.3) |
| Cash used in operating activities | $(4.5) | $(1.6) |
| Cash used in investing activities | $(1.8) | $(2.7) |
| Cash provided by financing activities | $74.3 | $18.9 |
| Cash and cash equivalents | $86.7 | $18.7 at December 31, 2013 |
| Total debt and capital lease obligations | $7.4 | $7.6 at December 31, 2013 |
| Total current assets / current liabilities | $99.3 / $24.2 | $33.9 / $29.2 at December 31, 2013 |
Revenue rose 31.2% year over year. Management attributed $3.2 million of growth to registered-user growth at existing customers and additions from new installed customers, and $0.8 million to higher transaction volumes. Registered users increased to 3.5 million from 2.6 million a year earlier. Stock-based compensation increased to $0.9 million from $0.3 million.
Material changes and financing
- Q1 gross margin was essentially unchanged year over year, but operating expenses grew 64.8%, faster than revenue; operating margin worsened from (17.4)% to (31.8)%. Sales and marketing rose 80.0%, R&D 46.6%, and general and administrative 59.2%.
- The March 25 IPO generated $73.6 million of net proceeds received by March 31. Preferred and redeemable shares converted into common stock at the IPO. The company reported total expected net IPO proceeds of approximately $86.4 million after the April 2 over-allotment sale; that additional sale was subsequent to quarter-end.
- At March 31, the company had $6.3 million of long-term debt and $15.7 million available under its Wells Fargo credit facility, with a 4.7% interest rate. It drew and repaid $12.5 million under the facility during the quarter. A $3.0 million letter of credit was also secured against the facility.
- The company failed the facility’s minimum trailing-twelve-month EBITDA covenant for Q1 and received a lender waiver; it reported compliance with the other financial covenants. On April 22, it repaid approximately $4.3 million of facility debt using IPO proceeds.
Outlook, commentary, and risks
Management expects investment in sales, marketing, product development, implementation and support teams, and technology infrastructure to continue. It expects costs to increase in absolute dollars; it anticipates operating expenses may decline as a percentage of revenue over the long term and believes scale could support improved margins, but does not provide numerical guidance. The filing states that the company has a history of losses and does not expect profitability in the foreseeable future.
Management cautions that quarterly results may fluctuate with customer sales and implementation timing, implementation capacity, seasonality, customer usage, and investment levels. Key disclosed risks include managing rapid growth and maintaining service quality; competition and pricing pressure; cybersecurity, data privacy, service availability and third-party integration; regulation affecting the company and its financial-institution customers; customer concentration in the financial services industry; and potential dilution or stock-price pressure from shares eligible for future sale. No material legal proceedings were reported. Disclosure controls were assessed as effective as of March 31, 2014. The company identified itself as an emerging growth company and elected not to use the extended transition period for new accounting standards.
Investor verification priorities
- Confirm the IPO proceeds, share counts, offering costs, and use of proceeds, distinguishing amounts received by March 31 from the April over-allotment proceeds.
- Review the credit-facility covenant waiver, repayment terms, remaining availability, and compliance after quarter-end.
- Assess whether registered-user and transaction growth can continue to translate into revenue while operating expenses and stock-based compensation rise.
- Track operating cash use, implementation and deferred costs, capital spending, and progress toward profitability; adjusted EBITDA is non-GAAP and should be considered alongside GAAP results and cash flow.
- Evaluate the company’s ability to scale implementation, customer support, data-center capacity, security, and regulatory compliance as its customer base grows.