Q2 Holdings, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2022, Q2 provided cloud-based digital banking, lending and banking-as-a-service solutions, primarily through SaaS subscriptions. Results are unaudited and may not indicate full-year performance.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $134.1 million | $116.5 million; up 15.1% |
| Gross profit and margin | $60.4 million; 45.1% | $53.2 million; 45.7% |
| Operating loss | $21.4 million | $17.5 million |
| Net loss | $23.6 million; $0.41 per share | $25.7 million; $0.46 per share |
| Adjusted EBITDA (non-GAAP) | $8.1 million | $9.9 million |
| Cash from operations | $(4.6) million | $(5.5) million |
Revenue comprised subscription $96.6 million, transactional $17.0 million, and services and other $20.4 million. Cash, cash equivalents and investments totaled $413.7 million at quarter-end. Investing activities used $92.8 million, including $84.7 million net purchases of investments, $3.9 million of property and equipment, and $4.3 million of capitalized software development costs.
Convertible notes had $677.2 million principal outstanding: $10.9 million due in 2023, $350.0 million due in 2025, and $316.3 million due in 2026. Management said liquidity was adequate for the next 12 months based on current operations and available resources. Remaining performance obligations were $1.39 billion; the company expected to recognize about 49% in the next 24 months.
Material changes versus the prior comparable period
- Revenue growth was driven mainly by additional solutions and Registered User growth, with a smaller contribution from higher transaction volumes. Registered Users were 19.7 million versus 18.3 million; ARR was $594.2 million versus $493.6 million. ARR is a company-defined operating measure, not a revenue forecast.
- Cost of revenue grew faster than revenue, and gross margin declined 0.6 percentage points. Sales and marketing expense rose 27.5% and R&D rose 16.2%, contributing to a higher operating loss.
- Net loss narrowed, but largely because adoption of ASU 2020-06 reduced non-cash convertible-debt interest expense by approximately $6.5 million year over year. Adjusted EBITDA also declined.
- Q2 adopted ASU 2020-06 on January 1, 2022. The adoption increased reported notes payable by $114.4 million, reduced additional paid-in capital by $157.0 million, and increased beginning accumulated deficit by $42.6 million; prior periods were not restated.
Outlook, commentary and risks
No numerical full-year guidance was provided. Management expected the 2022 sales environment and customer purchasing and implementation timing to improve relative to 2020 and the first half of 2021, while noting that prior-period delays could continue to affect results. The company expects continued investment in sales, R&D, implementation capacity and infrastructure; it anticipates higher costs in absolute dollars, with potential longer-term operating leverage as revenue scales.
Risks highlighted include uncertain COVID-19 impacts, inflation and wage pressure, competition for technical talent, implementation timing and capacity, and geopolitical developments including Russia’s invasion of Ukraine and heightened cyber-attack risk. Management stated inflation had not materially affected results to date but might not be fully offset through pricing or efficiencies. A favorable ordinary-course settlement contributed $0.7 million of other income; $0.4 million of unoccupied lease charges were recorded. The company reported no legal proceedings expected to have a material adverse effect and no material changes to its previously disclosed risk factors. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether revenue growth converts into improved gross margin and operating performance, given rising cost of revenue and operating expenses.
- Cash generation and investment needs, including the distinction between operating cash use and purchases or maturities of marketable investments.
- Convertible-note terms, the $10.9 million 2023 maturity, conversion conditions, and the effects of ASU 2020-06 on period comparisons.
- Trends in ARR, Registered Users, remaining performance obligations, implementations and customer retention; these measures have company-specific definitions and limitations.
- Exposure to wage inflation, hiring constraints, customer delays, cyber risks, and unrealized investment losses; the filing reported $1.3 million of gross unrealized investment losses at quarter-end and no recognized credit impairment.