Summary
Q2 Holdings grew revenue 22.1 percent in its fiscal third quarter, hitting $126.7 million on a GAAP basis for the three months ended September 30, 2021, against $103.8 million a year earlier. Management tied the gain mostly to additional solutions sold to new and existing customers and to growth in Registered Users, which contributed $20.0 million of the increase, while transaction volume added $2.9 million. Year-to-date GAAP revenue was $366.8 million, up 24.9 percent from the first nine months of 2020.
Gross profit for the quarter was $57.0 million, and gross margin was 45.0%, up from 44.7 percent in the prior-year quarter. On a non-GAAP basis, gross margin was 51.9 percent, down from 52.5 percent a year earlier and flat versus the second quarter of 2021. Adjusted EBITDA was $7.3 million, down from $8.1 million a year earlier and from $9.9 million in the second quarter.
The bottom line stayed deeply negative. The GAAP operating loss widened to $22.97 million from $19.85 million a year earlier, and the net loss widened to $31.58 million from $26.72 million. Diluted loss per share widened to $0.56 from $0.50. Operating margin still improved, to -18.1% from -19.1%. Over the first nine months, the net loss narrowed to $87.36 million from $99.80 million, and diluted loss per share narrowed to $1.55 from $1.95.
Operating metrics pointed to steady demand. The company exited the quarter with roughly 19.2 million Registered Users on the Q2 Platform, up 12 percent year over year and 2 percent sequentially. Deals signed in the quarter included a Tier 1 top 10 credit union for commercial banking, risk management and business account opening, a Tier 1 bank for the full digital banking suite, and a Tier 2 bank for a broad digital transformation contract led by retail digital banking and loan origination. Deferred revenue, current portion, was $100.1 million, up 28.6 percent from $77.9 million a year earlier, and remaining performance obligations reached $1.30 billion, up 8.3 percent. For the year ended December 31, 2020, revenue retention was 122 percent and annual churn was 5.9 percent.
Cash trends were uneven. Operating cash flow was negative $14.40 million for the quarter, down from positive $5.24 million in the prior-year quarter, while year-to-date operating cash flow improved to negative $8.39 million from negative $21.98 million. Capital expenditures were $1.68 million for the quarter. Cash, cash equivalents and investments totaled $394.6 million at September 30, 2021.
For the fourth quarter of 2021, management guided to total non-GAAP revenue of $131.3 million to $132.8 million, or 20 to 21 percent year-over-year growth, plus adjusted EBITDA of $7.3 million to $7.9 million. For the full year 2021, the company raised its outlook to non-GAAP revenue of $499.8 million to $501.3 million, about 23 percent growth, and adjusted EBITDA of $34.4 million to $35.0 million.
Risks cluster around the pandemic and the push upmarket. Q2 warned that its growing focus on larger Tier 1 customers could bring more uncertainty and variability into sales results, and that the timing of bookings may not reach revenue until later periods. The company also cited competition in new markets, cyberattack and data breach exposure, integration risk from acquisitions such as ClickSWITCH, and wage inflation from intense competition for technical talent. The MD&A said COVID-19 delays have slowed the rate at which Q2 adds Installed Customers, which stood at 450 as of December 31, 2020, and that the 2021 hiring growth rate is expected to be somewhat lower than in 2019 and prior years.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2021 | Q2 FY2021 | QoQ | Q3 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $126.7M | $123.6M | +2.6% | $103.8M | +22.1% |
| Gross profit | $57.0M | $55.3M | +3.0% | $46.4M | +22.8% |
| Gross margin | 45.0% | 44.8% | +0.2 pp | 44.7% | +0.2 pp |
| Research & development | $30.8M | $29.4M | +4.5% | $23.6M | +30.5% |
| Sales & marketing | $22.7M | $20.6M | +10.1% | $18.4M | +23.2% |
| General & administrative | $20.4M | $18.7M | +8.8% | $17.6M | +15.9% |
| Total operating expenses | $80.0M | $75.3M | +6.2% | $66.3M | +20.7% |
| Operating income (loss) | -$23.0M | -$19.9M | -15.2% | -$19.8M | -15.7% |
| Operating margin | -18.1% | -16.1% | -2.0 pp | -19.1% | +1.0 pp |
| Net income (loss) | -$31.6M | -$30.1M | -4.8% | -$26.7M | -18.2% |
| Net margin | -24.9% | -24.4% | -0.5 pp | -25.7% | +0.8 pp |
| Diluted EPS | -$0.56 | -$0.53 | -$0.03 | — | — |
| Customers | 1 | 1 | ±0.0% | — | — |
Risks
The MD&A states the COVID-19 pandemic has delayed customer purchasing decisions and implementations and that the company expects continued negative impacts on bookings, revenues, gross margins and cash flows from operations relative to pre-pandemic levels. It also reports contract terminations with customers who became insolvent as a result of the pandemic, and says the duration and impacts of the pandemic remain highly unpredictable and may disrupt historical seasonality.
Revenue depends on the timing of implementations and new customer deals, and the company notes implementations vary based on capacity, solution count, customer size and customer readiness, so unusually long or short implementations for even a small number of customers can cause quarterly variability. Management observed an improved sales environment in the quarter ended September 30, 2021 versus the first half of 2021 but still expects fiscal 2021 sales performance across all solutions to be slower than it otherwise would have been.
The MD&A cites continued intense competition for technical talent that has the potential to drive increased inflation in the wages required to hire and retain qualified employees, alongside increased employee attrition and skilled labor shortages in the broader reopening environment. Headcount growth is central to the company's 2021 budget and hiring plans, making wage inflation a direct cost risk.
The net rate of adding Installed Customers varies with customer attrition, including attrition resulting from merger and acquisition activity among financial institutions, and the company also reports contract terminations with customers who became insolvent during the pandemic. Churn was 5.9% for the year ended December 31, 2020, the high end of its 3.5% to 5.9% range over the last nine years.
Contractual obligations at September 30, 2021 include $691.1 million of convertible note payments including interest, of which $671.7 million falls due in the 3 to 5 year bucket. The company also reported operating cash flow of negative $8.4 million for the nine months ended September 30, 2021 and a $1.5 million loss on early extinguishment of a portion of the 2023 Notes, and it had to repurchase $63.7 million of the 2023 Notes during that period.
Subscription pricing is tied to the number of Registered Users, and management states it has no control or influence over whether End Users of its digital banking platform elect to become Registered Users. Registered Users were 19.2 million at September 30, 2021 versus 17.1 million at September 30, 2020, so growth in this metric is a key driver outside the company's control.
The company operates in the heavily regulated financial services industry and must comply with stringent security and technical regulations applicable to financial institutions, while continuing to incur incremental costs for public company compliance including Section 404 of the Sarbanes-Oxley Act and increased directors and officers liability insurance. It expects general and administrative expenses to keep increasing in absolute dollars partly to ensure continued regulatory and SOX compliance.
SaaS KPIs
All quarters →Registered Users
Non-GAAP gross margin
Installed Customers
Summary, forecast, risks and KPIs are extracted from Q2 Holdings, Inc.'s SEC filings for Q3 FY2021 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 2, 2026.