Summary
Q2 Holdings reported third quarter fiscal 2022 revenue of $144.75 million, up 14.2% from the prior-year quarter. Gross profit rose 17.3% to $66.86 million. Gross margin improved 1.2 percentage points to 46.2%. The bottom line still showed a loss, but net loss narrowed to $27.79 million. Diluted loss per share was $0.48, an improvement from the prior-year quarter. Operating loss widened to $27.09 million, and operating margin slipped 0.6 percentage points to -18.7%. For the first nine months of 2022, revenue was $419.13 million, up 14.3%, and net loss narrowed to $76.57 million.
Non-GAAP results showed stronger profitability. Non-GAAP revenue was $144.9 million, up 14% year over year. Non-GAAP gross margin rose to 52.1% from 51.9%. Adjusted EBITDA grew to $10.8 million from $7.3 million. Non-GAAP operating income was $5.648 million, up from $3.563 million. Non-GAAP net income was $5.624 million, or $0.10 per share, compared with $1.801 million, or $0.03 per share. CFO David Mehok said the strong adjusted EBITDA results were driven by an acceleration in higher margin subscription revenue growth and proactive cost management. Cash generation turned positive in the quarter: operating cash flow was $6.15 million, up $20.54 million from the prior-year quarter. For the nine months, operating cash flow was negative $8.25 million, up $0.14 million from the prior-year period. Capital expenditures were $3.84 million in the quarter, up $2.16 million, but down $7.13 million to $8.93 million for the nine months. Deferred revenue, current portion, was $101.06 million, up 0.9%. Remaining performance obligations were $1.39 billion, up 6.9%.
Sales execution was a bright spot. Q2 signed its strongest bookings of the year, including one Enterprise and five Tier 1 deals. The digital banking segment signed one Enterprise contract with a Top 50 U.S. bank and three Tier 1 contracts, including a Top 50 U.S. credit union, a Tier 1 bank, and a Tier 1 credit union. Digital lending signed two Tier 1 contracts, including a Tier 1 agricultural lender and a Top 100 U.S. bank. The platform ended the quarter with more than 20.9 million registered users, up 9% year over year and 4% sequentially. Annualized recurring revenue reached $633.7 million as of September 30, 2022, compared with $537.7 million a year earlier. Helix also gained traction, with a digital-first insurance company and an online gaming company called Mana signing contracts. CEO Matt Flake called it the strongest bookings performance of the year and said the demand environment remains positive. The company's net revenue retention rate was 119% for the year ended December 31, 2021, and annual revenue churn was 5.4% for the same year.
Guidance points to continued growth but with margin pressure. For the fourth quarter of 2022, Q2 expects non-GAAP revenue of $148.4 million to $150.4 million, representing year-over-year growth of 12% to 14%. Adjusted EBITDA is guided to $10.5 million to $12.5 million. For the full year 2022, non-GAAP revenue is expected to be $568.0 million to $570.0 million, up 13% to 14% year over year. Full-year adjusted EBITDA is guided to $39.0 million to $41.0 million, representing 7% of non-GAAP revenue. The CFO noted that third-quarter total revenue came in below the company's guidance, mostly because of lower-than-expected discretionary services and transactional revenue. Management expects continued pressure on professional services and transactional revenue into 2023.
Risks remain elevated. The macro environment is challenging, with inflation, rising interest rates, and concerns about a potential recession. Geopolitical uncertainty from Russia's invasion of Ukraine adds to volatility. Q2 observed a decline in customer demand for discretionary professional services and lower transactional revenue from Helix and payment solutions. The company implemented expense management measures in the third quarter and expects to continue them into the fourth quarter and 2023. Other risks include competition, unpredictable sales cycles, implementation timing, wage inflation, and labor shortages.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2022 | Q2 FY2022 | QoQ | Q3 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $144.8M | $140.3M | +3.2% | $126.7M | +14.2% |
| Gross profit | $66.9M | $62.9M | +6.3% | $57.0M | +17.3% |
| Gross margin | 46.2% | 44.8% | +1.4 pp | 45.0% | +1.2 pp |
| Research & development | $33.1M | $31.8M | +4.0% | $30.8M | +7.6% |
| Sales & marketing | $28.0M | $26.5M | +5.6% | $22.7M | +23.4% |
| General & administrative | $22.6M | $23.3M | -2.9% | $20.4M | +11.1% |
| Total operating expenses | $93.9M | $86.7M | +8.4% | $80.0M | +17.5% |
| Operating income (loss) | -$27.1M | -$23.8M | -13.9% | -$23.0M | -17.9% |
| Operating margin | -18.7% | -16.9% | -1.8 pp | -18.1% | -0.6 pp |
| Net income (loss) | -$27.8M | -$25.2M | -10.2% | -$31.6M | +12.0% |
| Net margin | -19.2% | -18.0% | -1.2 pp | -24.9% | +5.7 pp |
| Diluted EPS | -$0.48 | -$0.44 | -$0.04 | -$0.56 | +$0.08 |
| Customers | 2 | — | — | 1 | +100.0% |
Risks
During the quarter ended September 30, 2022, Q2 observed a decline in customer demand for discretionary aspects of its solutions, namely professional services, and a decline in transactional revenue from Helix and payment solutions resulting from decreased usage. Management expects continued pressure on professional services and transactional revenue into 2023 until the macroeconomic environment stabilizes or improves.
The Federal Reserve has raised interest rates multiple times since January 1, 2022 and signaled openness to further increases, which MD&A links to recession concerns and to financial institutions facing challenges assessing risk in loan portfolios and making new lending decisions. Those institutions may respond by reducing or delaying purchases of digital solutions and associated services.
Net revenue retention was 119% for the year ended December 31, 2021, and because implementations were weighted more heavily in the first half of 2021, management expects to see a lower net revenue retention rate in 2022.
Q2 describes an exceptionally challenging hiring environment throughout 2021 and into 2022 and expects intense competition for technical talent for the remainder of 2022, which has driven and may continue to drive wage inflation and higher costs for third-party recruiting. Headcount growth drove personnel cost increases across sales and marketing, research and development and general and administrative expense in the current periods.
GAAP operating loss widened to $27.09 million in FY2022 Q3 from $22.97 million in FY2021 Q3 (down 17.9%, loss widened), and year to date widened to $72.27 million from $60.43 million (down 19.6%, loss widened), while operating margin fell to -18.7% in the quarter from -18.1% (down 0.6 pp). Investment in personnel, technology infrastructure and capitalized software costs continues ahead of the related revenue benefit.
Lease and other restructuring charges increased 341.6% in the quarter ended September 30, 2022 to $5.5 million, largely from vacating a Texas facility including impairment of the right of use asset, plus severance. Q2 also implemented expense management measures in the quarter that it expects to continue into Q4 2022 and 2023.
The rate at which Q2 adds Installed Customers varies with customer attrition, including as a result of merger and acquisition activity among financial institutions, and the aggregate number of Registered Users is negatively impacted when Installed Customers terminate all or a portion of their arrangements.
SaaS KPIs
All quarters →Registered Users
Non-GAAP gross margin
Adjusted EBITDA
Non-GAAP Operating Income
Non-GAAP revenue
ARR
Summary, forecast, risks and KPIs are extracted from Q2 Holdings, Inc.'s SEC filings for Q3 FY2022 (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.