Q2 Holdings, Inc. Q1 FY2023 earnings

Q2 Holdings reported first quarter fiscal 2023 revenue of $153.0 million, up 14.1% from the prior-year quarter. Gross profit rose 21.4% to $73.3 million, and GAAP gross margin was 47.9%, up 2.9 percentage points. Non-GAAP revenue was $153.1 million, and non-GAAP gross margin was 54.0%. The company posted an operating loss of $21.2 million, an improvement of 0.9%, while operating margin was -13.9%, up 2.1 percentage points. Net loss was $0.5 million, narrowing 97.8%, and diluted EPS was -$0.01, improving 97.6%. Adjusted EBITDA was $16.5 million. Operating cash flow was $3.9 million, up 186.5%, and capital expenditures were $1.0 million, down 73.3%. Current deferred revenue was $122.1 million, up 18.1%, and remaining performance obligations were $1.53 billion, up 10.1%.

Sales execution was a bright spot. Q2 signed three Tier 1 digital banking contracts, including a Top 100 U.S. bank for retail, commercial, and small business banking that represented a top 5 digital banking win in company history by initial contract value. It also signed a Top 100 U.S. bank and a Top 100 U.S. credit union for commercial and small business banking. Expansion activity included an Alt-Fi customer using loan origination solutions and multi-year renewals with two of its top ten Helix customers. Registered Users on the digital banking platform were approximately 21.5 million at March 31, 2023, up from 19.7 million a year earlier, representing 9% year-over-year growth and 2% sequential growth. Annualized recurring revenue was $672.7 million at March 31, 2023, compared with $594.2 million at March 31, 2022. The company's net revenue retention rate was 110% for the year ended December 31, 2022. Revenue churn was 6.3% for that same year.

Guidance reflects both momentum and caution. For the second quarter of 2023, Q2 guided to non-GAAP revenue of $153.1 million to $155.1 million, which would represent year-over-year growth of 9% to 10%, and adjusted EBITDA of $14.0 million to $16.0 million, or 9% to 10% of non-GAAP revenue. For the full year 2023, the company guided to non-GAAP revenue of $618.0 million to $630.0 million, or year-over-year growth of 9% to 11%, and adjusted EBITDA of $67.0 million to $71.0 million, representing 11% of non-GAAP revenue. Management said the updated revenue outlook reflects a moderation in lower margin discretionary services projects, including one of its larger clients. It also said continued strength in subscription revenue and a focus on growth with improved profitability supported raising the full-year adjusted EBITDA guidance. Subscription revenue growth was 19% year over year in the first quarter of 2023, and the company expects that figure to increase as a percentage of revenue contribution for the remainder of 2023.

Risks remain tied to the banking sector and the macro backdrop. The failures of Silicon Valley Bank, Signature Bank, and First Republic Bank created market disruption and uncertainty for regional and community financial institutions, or RCFIs. Many of Q2's customers are RCFIs, and those institutions have faced deposit outflows as account holders moved funds to larger banks. First Republic Bank is a customer, and revenue from it for the year ended December 31, 2022 was predominantly professional services and represented approximately 2.5% of total revenue. Still, no individual customer represented more than 4% of total revenue for that year, and the top 20 customers collectively accounted for less than 25%. Q2 observed a decline in demand for discretionary professional services in the second half of 2022, and those effects continued in the first quarter of 2023. The company expects continued negative impacts on professional services in 2023 until the macroeconomic environment and the health of the financial services industry stabilize or improve. Transactional revenue from Helix and payment solutions also declined because of decreased usage. Management has implemented measures to drive efficiencies and improve expense scaling, and it expects those actions to continue in 2023 and into 2024. Other risks include competition, rising interest rates, inflation, an economic slowdown, cyberattacks, regulatory changes, and the company's convertible notes. Q2 repurchased a portion of its convertible senior notes during the quarter, a move that contributed a one-time gain to GAAP results. The company ended the quarter with a diversified revenue base, but the uncertain banking environment could still pressure sales cycles and customer spending decisions.