Q2 Holdings, Inc. Q2 FY2023 earnings

Q2 Holdings reported second quarter revenue of $154.5 million for the period ended June 30, 2023, up 10.1% from the prior-year quarter. GAAP gross margin was 47.8%, up 3.0 percentage points. Gross profit was $73.8 million, up 17.4%. The company still posted an operating loss of $23.7 million, roughly flat year over year, and a net loss of $23.6 million, an improvement of 6.3%. Diluted net loss per share was $0.41, an improvement of $0.03. Revenue growth remained positive, but the company continued to spend heavily on sales, research and development, and administration.

The non-GAAP results highlighted better operating leverage. Non-GAAP revenue was $154.6 million, up 10% from the prior-year quarter. Non-GAAP gross margin reached 54.2%, up from 51.3% a year earlier. Adjusted EBITDA was $17.6 million, up from $9.7 million. Management said Q2 closed its best first half of bookings in company history. The company signed two Tier 1 digital banking contracts, including a Tier 1 bank adopting a broad set of solutions led by retail banking and a Tier 1 U.S. bank using retail, small business, and commercial banking solutions. It also signed two Tier 1 digital lending contracts, including an expansion with a Top 100 U.S. bank for loan and relationship pricing solutions. One of the largest insurance companies in the nation signed for the Helix platform. The annual client conference drew more than 1,000 customers, partners, and prospects. Registered users reached approximately 21.7 million, up 8% year over year and 1% sequentially. ARR was $681.2 million, up from $615.5 million a year earlier.

Cash flow and backlog metrics improved. Operating cash flow was $13.1 million in the quarter, up $22.4 million from the prior-year quarter. Capital expenditures were $2.3 million, up 83.8%. Deferred revenue, current portion, was $111.5 million, up 16.3%. Remaining performance obligations were $1.53 billion, up 11.7%. On a year-to-date basis, revenue was $307.5 million, up 12.1%; gross profit was $147.1 million, up 19.3%; net loss was $24.1 million, an improvement of 50.5%; and diluted net loss per share was $0.42, an improvement of $0.43. Year-to-date operating cash flow was $17.0 million, while year-to-date capital expenditures were $3.3 million, down 35.4%. Year-to-date gross margin was 47.8%, up 2.9 percentage points, and year-to-date operating margin was negative 14.6%, up 1.9 percentage points.

Guidance points to slower near-term growth but higher profitability. For the third quarter of 2023, Q2 expects total non-GAAP revenue of $153.5 million to $156.5 million, which represents year-over-year growth of 6% to 8%. Adjusted EBITDA for the quarter is expected to be $17.0 million to $19.0 million, or 11% to 12% of non-GAAP revenue. For the full-year 2023, the company guided to total non-GAAP revenue of $620.0 million to $628.0 million, which represents year-over-year growth of 9% to 11%. Full-year adjusted EBITDA is expected to be $71.0 million to $75.0 million, or 11% to 12% of non-GAAP revenue. Management raised its adjusted EBITDA outlook for the remainder of the year, citing continued bookings strength and successful cost initiatives. The company did not provide a reconciliation of forward-looking adjusted EBITDA to GAAP net loss.

Risks remain tied to the health of financial institutions. The failures of Silicon Valley Bank, Signature Bank, and First Republic Bank have created market disruption and uncertainty, particularly for regional and community financial institutions. Deposit outflows toward larger institutions could pressure customer spending on digital solutions. Q2 already saw weaker demand for discretionary professional services and lower transactional revenue from Helix and payment solutions in the first half of 2023. First Republic Bank was a customer, and revenue from it represented approximately 2.5% of total revenue for the year ended December 31, 2022, mostly from professional services. No individual customer represented more than 4% of total revenue that year, and the top 20 customers accounted for less than 25%. Other risks include rising interest rates, inflation, competition, cybersecurity threats, regulatory changes, and the company's ability to execute on cost reductions. Management said efficiency measures will continue throughout 2023 and into 2024.