Q2 Holdings, Inc. Announces Fourth Quarter and Full-Year 2018 Financial Results

Total fourth quarter revenue of $67.2 million, up 30 percent
year-over-year, and full-year revenue of $241.1 million, up 24 percent
year-over-year

AUSTIN, Texas–(BUSINESS WIRE)–Q2
Holdings, Inc.
(NYSE:QTWO), a leading provider of digital banking
and lending solutions, today announced results for its fourth quarter
and full year ending Dec. 31, 2018.

Fourth Quarter and Full-Year 2018 Results

  • Revenue for the fourth quarter of $67.2 million, up 30 percent
    year-over-year and full-year revenue of $241.1 million, up 24 percent
    year-over-year.
  • GAAP gross margin for the fourth quarter of 47.3 percent, down from
    48.6 percent one year ago. Non-GAAP gross margin for the fourth
    quarter of 52.0 percent, down from 52.7 percent one year ago. GAAP
    gross margin for the full year of 49.5 percent, up from 48.7 percent
    in 2017. Full-year non-GAAP gross margin of 53.3 percent, up from 52.5
    percent in 2017.
  • GAAP net loss for the fourth quarter of $11.9 million, which compares
    to $5.5 million for the fourth quarter of 2017, and $8.9 million for
    the third quarter of 2018. GAAP net loss for the full year 2018 of
    $35.4 million, which compares to $26.2 million for the full year 2017.
    Adjusted EBITDA for the fourth quarter of $3.1 million, down from $4.1
    million one year ago and down from $5.7 million for the third quarter
    of 2018. Full-year adjusted EBITDA of $19.0 million compared to $10.2
    million in 2017.

The fourth quarter was a strong finish to a great year for Q2,” said
Matt Flake, CEO of Q2. “A favorable economic environment supported
record bookings for the platform business. We also meaningfully expanded
our total addressable market through the acquisitions of Cloud Lending,
a comprehensive lending and leasing platform, and Gro, a digital sales
and onboarding solution. The strength of our platform business combined
with an expanded product offering gives me confidence we are poised to
deliver accelerated revenue growth in 2019.”

Fourth Quarter Highlights

  • Signed a $30 billion bank in the Midwest to our retail and small
    business solution and a $9 billion bank in the Northeast for our
    retail, small business and corporate solutions.
  • Cloud Lending signed a $25 billion bank in the Northeast and a leading
    independent leasing company in the United States.
  • Q2 Open signed six deals including a Top 5 credit union for Q2’s
    CardSwap product.
  • Exited the fourth quarter with approximately 12.8 million registered
    users on the Q2 platform, representing 4 percent sequential and 23
    percent year-over-year growth.

Financial Outlook

Q2 Holdings is providing guidance for its first quarter 2019 as follows:

  • Total revenue of $70 million to $71 million, which would represent
    year-over-year growth of 28 percent to 30 percent.
  • Adjusted EBITDA of positive $1.2 million to positive $1.8 million.
    GAAP net loss is the most comparable GAAP measure to adjusted EBITDA.
    Adjusted EBITDA differs from GAAP net loss in that it excludes things
    such as depreciation and amortization, stock based compensation,
    acquisition-related costs, interest, income taxes and unoccupied lease
    charges. Q2 Holdings is unable to predict with reasonable certainty
    the ultimate outcome of these exclusions without unreasonable effort.
    Therefore, Q2 Holdings has not provided guidance for GAAP net loss or
    a reconciliation of the foregoing forward-looking adjusted EBITDA
    guidance to GAAP net loss.

Q2 Holdings is providing guidance for the full-year 2019 as follows:

  • Total revenue of $305 million to $309 million, which would represent
    year-over-year growth of 27 percent to 28 percent.
  • Adjusted EBITDA of positive $20 million to positive $22 million.
    Adjusted EBITDA differs from GAAP net loss in that it excludes things
    such as depreciation and amortization, stock based compensation,
    acquisition-related costs, interest, income taxes and unoccupied lease
    charges. Q2 Holdings is unable to predict with reasonable certainty
    the ultimate outcome of these exclusions without unreasonable effort.
    Therefore, Q2 Holdings has not provided guidance for GAAP net loss or
    a reconciliation of the foregoing forward-looking adjusted EBITDA
    guidance to GAAP net loss.
 

Conference Call Details

 

Date:

      Feb. 14, 2019

Time:

8:30 a.m. EST

Hosts:

Matt Flake, CEO / Jennifer Harris, CFO

Dial in:

US toll free: 1-833-241-4254
International: 1-647-689-4205

Conference ID:

8697209
 

Please join the conference call at least 10 minutes early to ensure the
line is connected. A live webcast of the conference call and financial
results will be accessible from the investor relations section of the Q2
website at http://investors.q2ebanking.com/.

An archived replay of the webcast will be available at this website on a
temporary basis shortly after the call.

About Q2 Holdings, Inc.

Q2, a financial experience company headquartered in Austin, Texas,
builds stronger communities by strengthening the financial institutions
that serve them. We empower banks, credit unions and other financial
services providers to be the ever-present companion on an account
holder’s financial journey—helping our customers unlock new
opportunities, grow their businesses and improve efficiencies. To learn
more about Q2, visit www.q2ebanking.com.

Use of Non-GAAP Measures

Q2 uses the following non-GAAP financial measures: adjusted EBITDA;
non-GAAP gross margin; non-GAAP gross profit; non-GAAP sales and
marketing expense; non-GAAP research and development expense; non-GAAP
general and administrative expense; non-GAAP operating loss; and,
non-GAAP net loss. Management believes that these non-GAAP financial
measures are useful measures of operating performance because they
exclude items that Q2 does not consider indicative of its core
performance.

In the case of adjusted EBITDA, Q2 adjusts net loss for such things as
interest, taxes, depreciation and amortization, stock-based
compensation, acquisition-related costs, amortization of technology and
intangibles, and unoccupied lease charges. In the case of non-GAAP gross
margin and non-GAAP gross profit, Q2 adjusts gross profit and gross
margin for stock-based compensation and amortization of acquired
technology. In the case of non-GAAP sales and marketing expense,
non-GAAP research and development expense, and non-GAAP general and
administrative expense, Q2 adjusts the corresponding GAAP expense to
exclude stock-based compensation. In the case of non-GAAP operating loss
and non-GAAP net loss, Q2 adjusts operating loss and net loss,
respectively, for stock-based compensation, acquisition related-costs,
amortization of acquired technology, amortization of acquired
intangibles, and unoccupied lease charges.

These non-GAAP measures should be considered in addition to, not as a
substitute for or superior to, the closest GAAP measures, or other
financial measures prepared in accordance with GAAP. A reconciliation to
the closest GAAP measures of these non-GAAP measures is contained in
tabular form on the attached unaudited condensed consolidated financial
statements.

Q2’s management uses these non-GAAP measures as measures of operating
performance; to prepare Q2’s annual operating budget; to allocate
resources to enhance the financial performance of Q2’s business; to
evaluate the effectiveness of Q2’s business strategies; to provide
consistency and comparability with past financial performance; to
facilitate a comparison of Q2’s results with those of other companies,
many of which use similar non-GAAP financial measures to supplement
their GAAP results; and in communication with our board of directors
concerning Q2’s financial performance.

Forward-looking Statements

This press release contains forward-looking statements, including
statements about Q2’s expanded addressable market as a result of
acquisitions, the strength of Q2’s platform business, Q2’s expanded
product offerings, positive sales and bookings momentum, optimism about
Q2’s performance in 2019, Q2’s ability to accelerate revenue growth in
2019, and Q2’s quarterly and annual financial guidance. The
forward-looking statements contained in this press release are based
upon Q2’s historical performance and its current plans, estimates and
expectations and are not a representation that such plans, estimates or
expectations will be achieved. Factors that could cause actual results
to differ materially from those described herein include risks related
to: (a) the risk of increased competition in its existing markets and as
it enters new sections of the market with Tier 1 customers, new markets
with Alt-FIs and FinTechs and new products and services; (b) the risk
that the market for Q2’s solutions does not grow as anticipated, in
particular with respect to Tier 1 customers and Alt-FI and FinTech
customers; (c) the risk that Q2’s increased focus on selling to larger
Tier 1 customers may result in greater uncertainty and variability in
Q2’s business and sales results; (d) the risk that changes in Q2’s
market, business or sales organization negatively impacts its ability to
sell its products and services; (e) the challenges and costs associated
with selling, implementing and supporting Q2’s solutions, particularly
for larger customers with more complex requirements and longer
implementation processes; (f) the risk that errors, interruptions or
delays in Q2’s products or services or Web hosting negatively impacts
Q2’s business and sales; (g) risks associated with data breaches and
breaches of security measures within Q2’s products, systems and
infrastructure and the resultant harm to Q2’s business and its ability
to sell its products and services; (h) the impact that a slowdown in the
economy, financial markets, and credit markets has on Q2’s customers and
Q2’s business sales cycles, prospects and customers’ spending decisions
and timing of implementation decisions, particularly in regions where a
significant number of Q2’s customers are concentrated; (i) the
difficulties and risks associated with developing and selling complex
new solutions and enhancements with the technical and regulatory
specifications and functionality required by customers and governmental
authorities; (j) the risks inherent in technology and implementation
partnerships that could cause harm to Q2’s business; (k) the
difficulties and costs Q2 may encounter with complex implementations of
its solutions and the resulting impact on reputation and the timing of
its revenue from any delayed implementations; (l) the risk that Q2 will
not be able to maintain historical contract terms such as pricing and
duration; (m) the risks associated with managing growth and the
challenges associated with improving operations and hiring, retaining
and motivating employees to support such growth; (n) the risk that
modifications or negotiations of contractual arrangements will be
necessary during Q2’s implementations of its solutions or the general
risks associated with the complexity of Q2’s customer arrangements; (o)
the risks associated with integrating acquired companies and
successfully selling and maintaining their solutions; (p) litigation
related to intellectual property and other matters and any related
claims, negotiations and settlements; (q) the risks associated with
further consolidation in the financial services industry; and (r) risks
associated with selling our solutions internationally.

Additional information relating to the uncertainty affecting the Q2
business are contained in Q2’s filings with the Securities and Exchange
Commission. These documents are available on the SEC Filings section of
the Investor Relations section of Q2’s website at http://investors.q2ebanking.com/.
These forward-looking statements represent Q2’s expectations as of the
date of this press release. Subsequent events may cause these
expectations to change, and Q2 disclaims any obligations to update or
alter these forward-looking statements in the future, whether as a
result of new information, future events or otherwise.

         
Q2 Holdings, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
 
December 31, December 31,
2018 2017
(unaudited) (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 108,341 $ 57,961
Restricted cash 1,815 2,315
Investments 68,979 41,685
Accounts receivable, net 19,668 13,203
Contract assets, current portion 598
Prepaid expenses and other current assets 3,983 3,115
Deferred solution and other costs, current portion 10,501 9,246
Deferred implementation costs, current portion   4,427     3,562  
Total current assets 218,312 131,087
Property and equipment, net 34,994 34,544
Deferred solution and other costs, net of current portion 16,761 12,973
Deferred implementation costs, net of current portion 9,948 8,295
Intangible assets, net 63,296 12,034
Goodwill 107,907 12,876
Contract assets, net of current portion 10,272
Other long-term assets   2,230     1,006  
Total assets $ 463,720   $ 212,815  
 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 9,169 $ 7,621
Accrued liabilities 9,329 10,562
Accrued compensation 12,652 11,511
Deferred revenues, current portion   42,531     38,379  
Total current liabilities 73,681 68,073
 
Convertible notes, net of current portion 182,723
Deferred revenues, net of current portion 23,063 28,289
Deferred rent, net of current portion 8,151 9,393
Other long-term liabilities   17,202     438  
Total liabilities 304,820 106,193
 
Stockholders’ equity:
Common stock 4 4
Treasury stock (855 )
Additional paid-in capital 331,355 259,726
Accumulated other comprehensive loss (37 ) (139 )
Accumulated deficit   (172,422 )   (152,114 )
Total stockholders’ equity   158,900     106,622  
Total liabilities and stockholders’ equity $ 463,720   $ 212,815  
 
 
Q2 Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands, except per share data)
                   
Three Months Ended December 31, Twelve Months Ended December 31,
2018 2017 2018 2017
(unaudited) (unaudited) (unaudited) (unaudited)
 
Revenues $ 67,177 $ 51,703 $ 241,100 $ 193,978
Cost of revenues (1) (2)   35,435     26,572     121,855     99,485  
Gross profit 31,742 25,131 119,245 94,493
 
Operating expenses:
Sales and marketing (1) 13,583 10,292 48,124 41,170
Research and development (1) 15,517 10,673 51,334 40,338
General and administrative (1) 12,659 9,863 44,990 37,179
Acquisition related costs 1,820 263 4,145 1,232
Amortization of acquired intangibles 857 368 1,844 1,481
Unoccupied lease charges (3)           658      
Total operating expenses   44,436     31,459     151,095     121,400  
Loss from operations (12,694 ) (6,328 ) (31,850 ) (26,907 )
Other income (expense), net   (2,345 )   137     (7,350 )   429  
Loss before income taxes (15,039 ) (6,191 ) (39,200 ) (26,478 )
Benefit from income taxes   3,176     670     3,803     314  
Net loss $ (11,863 ) $ (5,521 ) $ (35,397 ) $ (26,164 )
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale investments (32 ) (41 ) 24 (85 )
Foreign currency translation adjustment   78         78      
Comprehensive loss $ (11,817 ) $ (5,562 ) $ (35,295 ) $ (26,249 )
Net loss per common share:
Net loss per common share, basic and diluted $ (0.27 ) $ (0.13 ) $ (0.83 ) $ (0.63 )
Weighted average common shares outstanding, basic and diluted   43,429     41,777     42,797     41,218  
 
 

(1) Includes stock-based compensation expenses as
follows:

Three Months Ended December 31, Twelve Months Ended December 31,
2018 2017 2018 2017
Cost of revenues $ 1,453 $ 1,203 $ 4,773 $ 3,729
Sales and marketing 1,709 1,101 5,837 3,243
Research and development 2,172 1,337 6,852 4,464
General and administrative   3,289     2,672     11,758     9,503  
Total stock-based compensation expenses $ 8,623   $ 6,313   $ 29,220   $ 20,939  
 
(2)     Includes amortization of acquired technology of $1.7 million and
$0.9 million for the three months ended December 31, 2018 and 2017,
respectively and $4.5 million and $3.6 million for each of the
twelves months ended December 31, 2018 and 2017, respectively.
 
(3) Unoccupied lease charges include costs related to the early exit
from a portion of our south Austin facility, partially offset by
anticipated sublease income from that facility.
 
     
Q2 Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
   
Twelve Months Ended December 31,
2018 2017
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (35,397 ) $ (26,164 )
Adjustments to reconcile net loss to net cash from operating
activities:
Amortization of deferred implementation, solution and other costs 8,448 7,455
Depreciation and amortization 16,802 14,946
Amortization of debt issuance costs 829 28
Amortization of debt discount 7,646
Amortization of premiums on investments (3 ) 319
Stock-based compensation expenses 29,545 20,939
Deferred income taxes (2,050 ) (350 )
Other non-cash charges 553 30
Changes in operating assets and liabilities   (21,778 )   (7,731 )
Cash provided by operating activities 4,595 9,472
Cash flows from investing activities:
Net redemptions of investments (27,267 ) 158
Purchases of property and equipment (13,285 ) (12,315 )
Business combinations and asset acquisitions, net of cash acquired (130,694 ) (3,816 )
Purchases of intangible assets (46 )
Capitalization of software development costs       (970 )
Cash used in investing activities (171,292 ) (16,943 )
Cash flows from financing activities:
Proceeds from issuance of convertible notes, net of issuance costs 223,167
Purchase of convertible notes bond hedge (41,699 )
Proceeds from issuance of warrants 22,379
Proceeds from exercise of stock options to purchase common stock   12,730     11,559  
Net cash provided by financing activities   216,577     11,559  
Net increase in cash, cash equivalents, and restricted cash 49,880 4,088
Cash, cash equivalents, and restricted cash, beginning of period   60,276     56,188  
Cash, cash equivalents, and restricted cash, end of period $ 110,156   $ 60,276  
 
                   
Q2 Holdings, Inc.
Reconciliation of GAAP to Non-GAAP Measures
(in thousands, except per share data)
 
Three Months Ended December 31, Twelve Months Ended December 31,
2018 2017 2018 2017
(unaudited) (unaudited) (unaudited) (unaudited)
GAAP gross profit $ 31,742 $ 25,131 $ 119,245 $ 94,493
Stock-based compensation 1,453 1,203 4,773 3,729
Amortization of acquired technology   1,729     914     4,465     3,624  
Non-GAAP gross profit $ 34,924   $ 27,248   $ 128,483   $ 101,846  
 
Non-GAAP gross margin:
Non-GAAP gross profit $ 34,924 $ 27,248 $ 128,483 $ 101,846
GAAP revenue   67,177     51,703     241,100     193,978  
Non-GAAP gross margin   52.0 %   52.7 %   53.3 %   52.5 %
 
GAAP sales and marketing expense $ 13,583 $ 10,292 $ 48,124 $ 41,170
Stock-based compensation   (1,709 )   (1,101 )   (5,837 )   (3,243 )
Non-GAAP sales and marketing expense $ 11,874   $ 9,191   $ 42,287   $ 37,927  
 
GAAP research and development expense $ 15,517 $ 10,673 $ 51,334 $ 40,338
Stock-based compensation   (2,172 )   (1,337 )   (6,852 )   (4,464 )
Non-GAAP research and development expense $ 13,345   $ 9,336   $ 44,482   $ 35,874  
 
GAAP general and administrative expense $ 12,659 $ 9,863 $ 44,990 $ 37,179
Stock-based compensation   (3,289 )   (2,672 )   (11,758 )   (9,503 )
Non-GAAP general and administrative expense $ 9,370   $ 7,191   $ 33,232   $ 27,676  
 
GAAP operating loss $ (12,694 ) $ (6,328 ) $ (31,850 ) $ (26,907 )
Stock-based compensation 8,623 6,313 29,220 20,939
Acquisition related costs 1,820 263 4,145 1,232
Amortization of acquired technology 1,729 914 4,465 3,624
Amortization of acquired intangibles 857 368 1,844 1,481
Unoccupied lease charges           658      
Non-GAAP operating income $ 335   $ 1,530   $ 8,482   $ 369  
 
GAAP net loss $ (11,863 ) $ (5,521 ) $ (35,397 ) $ (26,164 )
Stock-based compensation 8,623 6,313 29,220 20,939
Acquisition related costs 1,820 263 4,145 1,232
Amortization of acquired technology 1,729 914 4,465 3,624
Amortization of acquired intangibles 857 368 1,844 1,481
Unoccupied lease charges 658
Amortization of debt discount and issuance costs   2,518         8,475      
Non-GAAP net income $ 3,684   $ 2,337   $ 13,410   $ 1,112  
 
Reconciliation from diluted weighted-average number of common shares
as reported to pro forma diluted weighted average number of common
shares
Diluted weighted-average number of common shares, as reported 43,429 41,777 42,797 41,218
Weighted-average effect of potentially dilutive shares   1,901     1,976     2,145     2,064  
Pro forma diluted weighted-average number of common shares 45,330 43,753 44,942 43,282
 
Calculation of non-GAAP income per share:
Non-GAAP net income $ 3,684 $ 2,337 $ 13,410 $ 1,112
Diluted weighted-average number of common shares   45,330     43,753     44,942     43,282  
Non-GAAP net income per share $ 0.08   $ 0.05   $ 0.30   $ 0.03  
 
Reconciliation of GAAP net loss to adjusted EBITDA:
GAAP net loss $ (11,863 ) $ (5,521 ) $ (35,397 ) $ (26,164 )
Depreciation and amortization 5,361 3,897 16,802 14,946
Stock-based compensation 8,623 6,313 29,220 20,939
(Benefit from) provision for income taxes (3,176 ) (670 ) (3,803 ) (314 )
Interest (income) expense, net 2,345 (137 ) 7,350 (429 )
Acquisition related costs 1,820 263 4,145 1,232
Unoccupied lease charges           658      
Adjusted EBITDA $ 3,110   $ 4,145   $ 18,975   $ 10,210  

Contacts

MEDIA CONTACT:
Emma Chase
Red Fan Communications
O:
(512) 551-9253 / C: (512) 917-4319
[email protected]

INVESTOR CONTACT:
Bob Gujavarty
Q2 Holdings, Inc.
O:
(512) 439-3447
[email protected]

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