Q2 Holdings, Inc. Q1 FY2022 earnings

Q2 Holdings reported first quarter fiscal 2022 revenue of $134.07 million, up 15.1% from the prior-year quarter. Gross profit rose 13.5% to $60.40 million. Gross margin slipped to 45.1%, down 0.6 percentage points year over year. Operating loss widened 22.2% to $21.40 million, and operating margin was -16.0%, down 0.9 percentage points. Net loss narrowed 8.2% to $23.56 million, while diluted EPS loss narrowed to $0.41, up $0.05. The company still spends heavily to support growth, so GAAP profitability remains negative even as revenue scales.

On a non-GAAP basis, revenue was $134.3 million, up 15 percent year over year and up 1 percent from the fourth quarter of 2021. Non-GAAP gross margin was 51.4%, down from 52.6% for the prior-year quarter and 51.5% for the fourth quarter of 2021. Adjusted EBITDA was $8.1 million, down from $9.9 million for the prior-year quarter and $10.8 million for the fourth quarter of 2021. CEO Matt Flake called the quarter a solid start and pointed to a broad range of deals in digital lending and banking. CFO David Mehok said the company is raising its full-year guidance, citing confidence in a reacceleration of revenue growth and margin expansion exiting 2022 and into 2023.

The sales pipeline showed momentum in larger customers. Q2 Holdings signed two enterprise contracts and one Tier 1 digital lending contract, including an Enterprise, Top 10 U.S. bank for loan pricing, an Enterprise, Top 50 U.S. bank for loan pricing, and a Tier 1 U.S. credit union for loan origination. It also signed three Tier 1 digital banking contracts for retail and commercial digital banking solutions. Registered users reached 19.7 million, up 8 percent year over year and 3 percent sequentially. Annualized recurring revenue was $594.2 million at March 31, 2022, compared with $493.6 million at March 31, 2021. The Q2 Innovation Studio expanded its total fintech partners by 25%, and more than 50% of Q2 digital banking customers now use Innovation Studio in at least one program. Helix launched a strategic program with NYDIG, which is using the platform for a payroll offering called Bitcoin Savings Plan.

Retention and cash flow metrics were mixed. Net revenue retention rate was 119% for the year ended December 31, 2021, and annual revenue churn was 5.4% for the same year. Management expects a lower net revenue retention rate in 2022 because implementations were weighted more heavily in the first half of 2021. Operating cash flow was negative $4.62 million, up 15.6% from the prior-year quarter. Capital expenditures were $3.87 million, down 36.7%. Deferred revenue, current portion, was $103.32 million, up 16.2%. Remaining performance obligations were $1.39 billion, up 6.9%. Those figures suggest the contracted revenue base continues to grow, though the company remains cash flow negative on an operating basis.

Guidance points to steady growth but still modest adjusted EBITDA margins. For the second quarter of 2022, Q2 Holdings expects non-GAAP revenue of $139.5 million to $141.0 million, which would represent year-over-year growth of 12 percent to 14 percent, and adjusted EBITDA of $7.4 million to $8.9 million, representing 5 percent to 6 percent of non-GAAP revenue. For the full-year 2022, the company expects non-GAAP revenue of $577.5 million to $581.5 million, which would represent year-over-year growth of 15 percent to 16 percent, and adjusted EBITDA of $41.4 million to $44.4 million, representing 7 percent to 8 percent of non-GAAP revenue. The guidance is non-GAAP and excludes items such as stock-based compensation, depreciation and amortization, acquisition-related costs, and other charges. Q2 Holdings states it cannot predict GAAP net loss or reconcile adjusted EBITDA guidance to GAAP net loss without unreasonable effort.

Risks remain familiar for a company selling into financial institutions. Management cites competition, especially as it moves into Tier 1 and Enterprise accounts, uncertainty around the COVID-19 pandemic, inflation and a potential economic slowdown, labor shortages and wage inflation, cyberattacks and data breaches, implementation delays, integration of acquired companies, and higher operating expenses in 2022 and beyond. Other risks include financial services consolidation, international operations including the impact of Russia's invasion of Ukraine, and debt repayment obligations. The quarter showed healthy top-line growth and a rising recurring revenue base, but GAAP losses and a negative operating cash flow mean the company still has work to do on profitability.