Q2 Holdings, Inc. Q1 FY2024 earnings

Q2 Holdings reported first quarter fiscal 2024 revenue of $165.5 million, up 8.2% from the prior-year quarter. Gross profit rose 12.2% to $82.3 million. Gross margin expanded 1.8 percentage points to 49.7%. Operating loss narrowed to $14.2 million, and operating margin improved 5.3 percentage points to negative 8.6%. The bottom line moved the other way. GAAP net loss widened to $13.8 million. The prior-year quarter included a one-time gain from the partial repurchase of convertible senior notes. Diluted loss per share widened to a loss of $0.23.

Cash generation improved. Operating cash flow was $13.4 million, up 245.0% from the prior-year quarter. Capital expenditures were $1.4 million, up 36.1%. Free cash flow, a non-GAAP measure, was $6.0 million versus negative $3.2 million in the prior-year quarter. Adjusted EBITDA, also non-GAAP, rose to $25.2 million from $16.5 million. Non-GAAP gross margin was 54.9%, up from 54.0%. Deferred revenue, current portion, was $132.4 million, up 8.5% from the prior-year quarter. Remaining performance obligations, or backlog, totaled $1.92 billion, up 25.5% from the prior-year quarter. Subscription annual recurring revenue reached $615.1 million, up 18% year over year. Total annual recurring revenue was $761.0 million, up from $672.7 million.

Operational momentum was broad. The company signed four Tier 1 digital banking contracts, including two new banks and two expansion agreements with existing customers. One new bank added commercial solutions in its initial agreement. Two expansion deals brought existing customers to the full retail, small-to-medium business, and commercial platform. Q2 signed more total Tier 2 and Tier 3 digital banking contracts in the quarter than in any quarter of 2023. It also signed two Tier 1 expansion deals with existing customers using relationship pricing solutions. Q2 Innovation Studio was included in every net new digital banking win. The customer base spans roughly 1,400 customers. Management estimates an expansion opportunity of $3 billion in annual recurring revenue, with nearly one-third from Tier 1 customers. Registered Users were 23.0 million at March 31, 2024, compared with 21.5 million at March 31, 2023.

Guidance points to steady growth. For the second quarter of 2024, Q2 guided to non-GAAP revenue of $169.0 million to $172.0 million, representing year-over-year growth of 9% to 11%. It guided to adjusted EBITDA of $26.0 million to $28.0 million, or 15% to 16% of non-GAAP revenue. For full-year 2024, the company raised its outlook to non-GAAP revenue of $686.0 million to $692.0 million, representing year-over-year growth of 10% to 11%. Full-year adjusted EBITDA guidance is $110.0 million to $114.0 million, or 16% to 17% of non-GAAP revenue. The guidance is non-GAAP. The company did not provide a reconciliation of forward-looking adjusted EBITDA to GAAP net loss because it cannot predict certain excluded items without unreasonable effort.

Risks remain substantial. The GAAP net loss widened even as operating loss narrowed, partly because the prior-year quarter included a one-time gain from the partial repurchase of convertible notes. Macroeconomic and industry risks remain. The company cited higher interest rates, persistent inflation, tight labor markets, wage inflation, geopolitical uncertainty, recession fears, and challenges in the financial services industry. It noted that bank failures and liquidity concerns have created market disruption, especially for regional and community financial institutions. Regulatory changes, commercial real estate lending scrutiny, and potential bank failures could further strain customers. Other risks include competition, sales cycle and implementation timing, dependence on FinTech and alternative finance customers, cyberattacks, data breaches, and evolving regulation of artificial intelligence and machine learning. The company also flagged risks tied to its convertible notes and capital access.