Summary
Q2 Holdings reported third quarter 2023 revenue of $155.0 million, up 7.1 percent from the prior-year quarter and flat from the second quarter of 2023. GAAP gross margin was 47.8 percent, up from 46.2 percent a year earlier and flat with the second quarter. The company posted a GAAP net loss of $23.2 million, compared with a net loss of $27.8 million in the prior-year quarter. Non-GAAP revenue was $155.0 million, up 7 percent year over year and flat sequentially. Non-GAAP gross margin came in at 53.9 percent, up from 52.1 percent in the prior-year quarter but down from 54.2 percent in the second quarter. Adjusted EBITDA was $19.7 million, up from $10.8 million a year earlier and $17.6 million in the second quarter. The company said adjusted EBITDA margin rose more than 500 basis points from the prior-year period.
On a GAAP basis, gross profit was $74.1 million, up 10.9 percent from the prior-year quarter. The operating loss was $23.2 million, narrowing from $27.1 million a year earlier. Year-to-date revenue reached $462.5 million, up 10.3 percent. The year-to-date net loss was $47.3 million, improving from $76.6 million. Diluted loss per share was $0.40 for the quarter, compared with a loss of $0.48 in the prior-year quarter, and $0.81 year to date versus $1.34. Operating cash flow was $16.8 million for the quarter, up from $6.5 million, and $33.7 million for the first nine months versus negative $7.3 million. Capital expenditures were $1.3 million, down from $3.8 million in the prior-year quarter. Deferred revenue, current portion, was $115.8 million, up 14.6 percent year over year. Remaining performance obligations were $1.57 billion, up 12.9 percent. Gross margin for the first nine months was 47.8 percent, up from 45.4 percent, and operating margin for the quarter was negative 15.0 percent, up from negative 18.7 percent.
Operationally, Q2 signed one Enterprise and one Tier 1 digital banking contract, including a Top 20 U.S. bank and a Tier 1 U.S. bank. It also signed two Enterprise and one Tier 1 digital lending contract, including expansions with two Top 10 U.S. banks and a Tier 1 U.S. bank. One of its largest fintech customers signed a Helix contract. The company supported a digital-only brand launch for a U.S. bank. Registered users on the digital banking platform exceeded 22.0 million at quarter end, representing 5 percent year-over-year growth and 2 percent sequential growth. Subscription ARR was $547.0 million as of September 30, 2023, up from $477.9 million a year earlier. Total ARR was $693.6 million, up from $633.7 million. Management noted subscription revenue grew 11 percent and 15 percent year over year for the three and nine months ended September 30, 2023. Net revenue retention was 110 percent for the year ended December 31, 2022, and annual revenue churn was 6.3 percent for that year.
For the fourth quarter of 2023, management guided to non-GAAP revenue of $160.3 million to $163.3 million, which would represent year-over-year growth of 9 percent to 11 percent, and adjusted EBITDA of $21.2 million to $23.2 million, or 13 percent to 14 percent of non-GAAP revenue. For the full year 2023, the company guided to non-GAAP revenue of $622.5 million to $625.5 million, representing 10 percent year-over-year growth, and adjusted EBITDA of $75.0 million to $77.0 million, or 12 percent of non-GAAP revenue. The CEO pointed to a strong pipeline and confidence in the profitable growth strategy for the remainder of the year and into 2024. The CFO cited expected acceleration of subscription revenue and increased cost efficiencies in the fourth quarter.
Risks remain substantial. The company operates in a financial services industry facing higher interest rates, inflation, tight labor markets, wage inflation, and geopolitical uncertainty. The failures of Silicon Valley Bank, Signature Bank, and First Republic Bank created market disruption, particularly for regional and community financial institutions. First Republic, which was seized and sold in May 2023, was a customer, and revenue from it represented approximately 2.5 percent of total revenue for the year ended December 31, 2022, mostly professional services. Deposit outflows at regional and community institutions could reduce or delay purchases of digital solutions. Q2 has already seen a decline in demand for discretionary professional services and lower transactional revenue from Helix and payment solutions due to decreased usage. Management expects continued negative impacts on professional services for the remainder of 2023 and into 2024, until the macroeconomic environment and the health of the financial services industry stabilize or improve. Competition, hiring and retention, and the timing of large implementations also pose risks.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2023 | Q2 FY2023 | QoQ | Q3 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $155.0M | $154.5M | +0.3% | $144.8M | +7.1% |
| Gross profit | $74.1M | $73.8M | +0.4% | $66.9M | +10.9% |
| Gross margin | 47.8% | 47.8% | +0.1 pp | 46.2% | +1.7 pp |
| Research & development | $34.5M | $34.1M | +1.3% | $33.1M | +4.4% |
| Sales & marketing | $26.1M | $28.7M | -9.0% | $28.0M | -6.6% |
| General & administrative | $28.1M | $27.1M | +3.5% | $22.6M | +24.2% |
| Total operating expenses | $97.3M | $97.5M | -0.2% | $93.9M | +3.6% |
| Operating income (loss) | -$23.2M | -$23.7M | +2.1% | -$27.1M | +14.5% |
| Operating margin | -14.9% | -15.3% | +0.4 pp | -18.7% | +3.8 pp |
| Net income (loss) | -$23.2M | -$23.6M | +1.9% | -$27.8M | +16.6% |
| Net margin | -14.9% | -15.3% | +0.3 pp | -19.2% | +4.3 pp |
| Diluted EPS | -$0.40 | -$0.41 | +$0.01 | -$0.48 | +$0.08 |
| Customers | 20 | 20 | ±0.0% | 2 | +900.0% |
Risks
The challenging macroeconomic environment and financial services industry turmoil, including the 2023 failures of Silicon Valley Bank, Signature Bank and First Republic Bank, have created market disruption and uncertainty for regional and community financial institutions. A substantial majority of revenue comes from sales of Q2's digital banking platform to U.S. based RCFIs, so deposit outflows, reduced lending and higher costs at these customers could limit their spending on Q2's solutions.
Revenue is concentrated in the financial services industry and especially U.S. based RCFIs with less than $100 billion in assets. Industry merger and acquisition activity reduces the number of new financial institutions and may give merged customers greater leverage or lead them to discontinue, reduce or change terms for Q2's solutions; although no individual customer represented more than 4% of total revenue and the top 20 customers were less than 25% of total revenue for the year ended December 31, 2022.
Q2's sales process involves prolonged evaluations for larger financial services providers, typically six to nine months or longer, and is unpredictable, time-consuming and costly. During the second half of 2022 Q2 observed a decline in customer demand for discretionary professional services and decreased usage of Helix and payment solutions; these effects continued throughout 2023 to date, and Q2 expects continued negative impacts on professional services for the remainder of the year and into 2024.
Q2's solutions process and store personally identifiable information, and the threat landscape includes ransomware, account take-over attacks, nation-state actors and increased threats from the use of artificial intelligence. A security incident could lead to regulatory enforcement, fines, litigation, negative publicity and loss of customers.
As of September 30, 2023, Q2 had $304.0 million principal of 0.75% Convertible Senior Notes due 2026 and $191.0 million principal of 0.125% Convertible Senior Notes due 2025. Debt repayment obligations may impair future financing flexibility, and conversion of the notes or the related capped call transactions could dilute stockholders or affect the price of Q2's common stock.
The markets Q2 serves are intensely competitive, with point solution vendors, core processing vendors and internally developed systems; named competitors include NCR, Alkami, Finastra, Fiserv, Jack Henry, FIS, nCino, Oracle and others, some with significantly more resources. Industry consolidation could lead to increased competition, pricing pressure or loss of market share.
Functionality depends on integration with third-party systems and services, including core processing software, and Q2 has no formal API arrangements with many providers. If a provider changes features, discontinues access, competes with Q2, suffers an outage or is acquired, Q2 may be unable to meet customer obligations and its solutions may not operate effectively.
Q2 faces evolving regulation of AI, machine learning and the receipt, collection, storage, processing and transfer of data, as well as financial services regulations applicable to Q2 and its customers. Compliance costs and potential violations could adversely affect the business.
Q2 depends on its management team and key employees and faces competition for talent and labor cost increases. Although the hiring environment became less challenging and voluntary turnover reduced in the second half of 2022 and in 2023, Q2 may still experience wage inflation to hire and retain qualified employees.
Complex implementations for larger customers can lead to unexpected expenses and delays in revenue recognition. If customers do not allocate internal resources, require complex acceptance testing, or have integration issues with third-party systems, Q2 may delay revenue recognition and experience adverse effects on bookings timing.
Q2's solutions are complex and may contain defects or errors, including failures associated with transaction processing or interest, principal or balance calculations. Such issues could cause customer terminations, liability, increased regulatory oversight, fines and reputational harm.
Q2 has experienced high growth and expanded its workforce, solution offerings and international operations; failure to manage this growth or a decline in growth rate could strain internal controls and systems, increase expenses and harm financial performance.
SaaS KPIs
All quarters →Registered Users
Non-GAAP gross margin
Adjusted EBITDA
Installed Customers
Non-GAAP Operating Income
Subscription Revenue Growth
Total ARR
Subscription ARR
Summary, forecast, risks and KPIs are extracted from Q2 Holdings, Inc.'s SEC filings for Q3 FY2023 (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.