Q2 Holdings, Inc. Q3 FY2024 earnings

Q2 Holdings posted third quarter fiscal 2024 revenue of $175.0 million, up 12.9% year over year. Gross profit rose 20.1% to $89.1 million. Gross margin expanded to 50.9%, a 3.0 percentage point increase. The company still recorded an operating loss of $12.8 million, though that loss narrowed from the prior-year quarter, and operating margin improved to -7.3%, up 7.6 percentage points. Net loss was $11.8 million, and diluted EPS was -$0.20. Both figures improved compared with the prior-year quarter.

Subscription Annualized Recurring Revenue reached $654.6 million, up 20% year over year. Total RPO, or backlog, was $2.03 billion, up 29.3%, and the press release notes a record $467 million year-over-year increase. The current portion of deferred revenue was $141.3 million, up 22.0%. Registered Users were 24.4 million at September 30, 2024, compared with 22.0 million at September 30, 2023. Subscription revenue now makes up more than 80% of total revenue.

Bookings momentum was broad. Q2 signed six Enterprise and Tier 1 deals, including three with Top 50 U.S. banks. The quarter included two Enterprise and one Tier 1 digital banking contracts, with two new banks and one Enterprise Bank expansion. Relationship pricing added two Enterprise and one Tier 1 contracts, highlighted by a top 50 U.S. bank. Envisant signed for Q2 Fabric, which combines Helix embedded finance with Q2 digital banking. The third quarter was the strongest cross-sale bookings quarter so far in 2024, with nearly 50% of incremental ARR bookings from existing customers. The largest digital banking win was a Tier 2 bank adopting retail, SMB and commercial solutions. Relationship pricing had the largest overall ARR deal in the quarter and the fifth largest relationship pricing deal in company history. Helix had a significant renewal and expansion with one of its largest customers.

For the fourth quarter of 2024, Q2 guided to total non-GAAP revenue of $178.1 million to $181.1 million, which would represent year-over-year growth of 10 to 12 percent. It guided to adjusted EBITDA of $34.3 million to $36.3 million, or 19% to 20% of non-GAAP revenue. For the full year 2024, the company updated total non-GAAP revenue guidance to $691.5 million to $694.5 million, representing year-over-year growth of 11 percent. Full year adjusted EBITDA guidance is $122.0 million to $124.0 million, or 18% of non-GAAP revenue. These are non-GAAP figures. Q2 does not provide a reconciliation of forward-looking adjusted EBITDA to GAAP net loss because it cannot predict certain excluded items without unreasonable effort.

Operating cash flow was $43.25 million in the quarter, up 158.2%. For the first nine months of 2024, operating cash flow was $92.72 million, up 175.0%. Capital expenditures were $2.40 million in the quarter, up 88.1%. Free cash flow, a non-GAAP measure, was $69.9 million for the first nine months of 2024, compared with $9.8 million in the prior-year period. Adjusted EBITDA was $32.6 million, up from $19.7 million in the prior-year quarter, and non-GAAP gross margin was 56.0%, up from 53.9%.

Risks remain tied to the financial services backdrop. Management cited global economic uncertainty, high and shifting interest rates, inflation, tight labor markets, wage inflation, recession fears, and pressure on corporate IT expenditures. Bank failures, mergers and acquisitions among financial institutions, and increased regulatory scrutiny could affect customer spending. The press release also names competition, timing of customer implementations, cybersecurity and fraud, artificial intelligence and BaaS regulation, third-party partnerships, and debt repayment obligations as risks. Q2 said it believes its cash flow from operations and other sources of liquidity are adequate for the next twelve months.