Q2 Holdings, Inc. Announces Second Quarter 2017 Financial Results

Total second quarter revenue of $47.6 million, up 32 percent year-over-year

AUSTIN, Texas--(BUSINESS WIRE)--Q2 Holdings, Inc. (NYSE:QTWO), a leading provider of secure, cloud-based digital banking solutions for community-focused financial institutions, today announced results for its second quarter ending June 30, 2017.

Second Quarter 2017 Results

• Revenue for the second quarter of $47.6 million, up 32 percent year-over-year and up 7 percent sequentially.
• GAAP gross margin for the second quarter of 48.9 percent, up from 47.6 percent one year ago. Non-GAAP gross margin for the second quarter of 52.6 percent, up from 51.1 percent one year ago.

• GAAP net loss for the second quarter of $7.8 million, which compares to a GAAP net loss of $9.7 million for the second quarter of 2016. Adjusted EBITDA for the second quarter of positive $1.4 million, an improvement from negative $2.3 million one year ago.

“We executed well across the organization in the second quarter,” said Matt Flake, CEO of Q2. “I was particularly pleased with the uptick in bank activity in the quarter and continued strength across credit unions. I am encouraged by our Tier 1 pipeline and optimistic that we should convert multiple opportunities in the second half of 2017.”

Second Quarter 2017 Highlights

• Exited the second quarter with approximately 9.6 million registered users on the Q2 Platform, representing 7 percent sequential and 25 percent year-over-year growth.
• Launched Q2 Open with early adopter Qapital, a leading, mobile-first fintech company whose personal finance app has more than 300,000 active users.
• Received the NAFCU Services Innovation Award for Q2 SMART. The NAFCU Services annual Innovation Awards are the credit union industry’s most recognized awards competition for groundbreaking solutions.

Financial Outlook

Q2 Holdings is providing guidance for its third quarter 2017 as follows:

• Total revenue of $49.8 to $50.2 million, which would represent year-over-year growth of 30 percent to 31 percent.
• Adjusted EBITDA of positive $2.2 million to $2.6 million. GAAP net loss is the most comparable GAAP measure to adjusted EBITDA. Adjusted EBITDA differs from GAAP net loss in that it excludes depreciation and amortization, stock based compensation, acquisition-related costs, interest, and income taxes. 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 2017 as follows:

• Total revenue of $193.8 to $195.0 million, which would represent year-over-year growth of 29 percent to 30 percent.
• Adjusted EBITDA of positive $7.8 million to $8.8 million. Adjusted EBITDA differs from GAAP net loss in that it excludes depreciation and amortization, stock based compensation, acquisition-related costs, interest, and income taxes. 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:	Aug. 3, 2017
Time:	8:30 a.m. EDT
Hosts:	Matt Flake, CEO / Jennifer Harris, CFO
Dial in:	US toll free: 1-877-201-0168
	International: 1-647-788-4901
Conference ID:	51913770

Please join the conference call at least 10 minutes before start time to ensure the line is connected. A live webcast of the conference call will be accessible from the investor services section of the Q2 Holdings, Inc. website at http://investors.q2ebanking.com/.

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

About Q2 Holdings, Inc.

Q2 Holdings, Inc. (Q2) is a leading provider of secure, cloud-based digital banking solutions headquartered in Austin, Texas. Q2 is driven by a culture of partnership and dedication to empowering community-focused banks and credit unions with digital banking solutions that help them stand apart, scale smart and grow beyond with retail and commercial account holders. Q2’s solutions are designed to deliver a compelling, secure and consistent user experience on any device and enable customers to improve account holder retention and to create incremental sales opportunities. 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 positive sales momentum, increased purchasing activity among credit unions and banks, optimism about our Tier 1 pipeline, 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 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; (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; and (q) the risks associated with further consolidation in the financial services industry.

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 Services 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)
		June 30,			December 31,
			2017			2016
		(unaudited)			(unaudited)
Assets
Current assets:
	Cash and cash equivalents	$	34,471		$	54,873
	Restricted cash		2,915			1,315
	Investments		44,185			42,249
	Accounts receivable, net		15,012			12,240
	Prepaid expenses and other current assets		4,074			3,215
	Deferred solution and other costs, current portion		8,182			8,839
	Deferred implementation costs, current portion		3,400			2,938
Total current assets			112,239			125,669
Property and equipment, net			31,565			27,480
Deferred solution and other costs, net of current portion			13,213			11,125
Deferred implementation costs, net of current portion			8,276			8,096
Intangible assets, net			14,718			15,208
Goodwill			12,876			12,876
Other long-term assets			513			526
Total assets		$	193,400		$	200,980
Liabilities and stockholders' equity
Current liabilities:
	Accounts payable and accrued liabilities	$	19,900		$	29,088
	Deferred revenues, current portion		32,057			30,123
Total current liabilities			51,957			59,211
Deferred revenues, net of current portion			30,500			31,707
Deferred rent, net of current portion			10,010			9,466
Other long-term liabilities			586			361
Total liabilities			93,053			100,745
Stockholders' equity:
	Common stock		4			4
	Treasury stock		(597	)		(417	)
	Additional paid-in capital		241,835			226,485
	Accumulated other comprehensive loss		(84	)		(54	)
	Accumulated deficit		(140,811	)		(125,783	)
Total stockholders' equity			100,347			100,235
Total liabilities and stockholders' equity		$	193,400		$	200,980

Q2 Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands, except per share data)
		Three Months Ended June 30,						Six Months Ended June 30,
			2017			2016			2017			2016
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues		$	47,625		$	36,005		$	92,159		$	69,764
Cost of revenues^(1) (2)			24,328			18,870			47,100			36,684
Gross profit			23,297			17,135			45,059			33,080
Operating expenses:
	Sales and marketing ^(1)		11,096			9,611			20,974			17,818
	Research and development ^(1)		9,922			7,830			19,573			15,733
	General and administrative^(1)		9,268			7,437			17,720			14,858
	Acquisition related costs		351			1,476			699			2,958
	Amortization of acquired intangibles		373			368			744			736
	Unoccupied lease charges		-			33			-			33
Total operating expenses			31,010			26,755			59,710			52,136
Loss from operations			(7,713	)		(9,620	)		(14,651	)		(19,056	)
Other income (expense), net			109			(85	)		143			(71	)
Loss before income taxes			(7,604	)		(9,705	)		(14,508	)		(19,127	)
Provision for income taxes			(217	)		(3	)		(353	)		(233	)
Net loss		$	(7,821	)	$	(9,708	)	$	(14,861	)	$	(19,360	)
Other comprehensive loss
	Unrealized gain (loss) on available-for-sale investments		(29	)		16			(30	)		105
Comprehensive loss		$	(7,850	)	$	(9,692	)	$	(14,891	)	$	(19,255	)
Net loss per common share:
	Net loss per common share, basic and diluted	$	(0.19	)	$	(0.25	)	$	(0.36	)	$	(0.49	)
Weighted average common shares outstanding, basic and diluted			41,064			39,434			40,848			39,229
^(1)	Includes stock-based compensation expenses as follows:
		Three Months Ended June 30,						Six Months Ended June 30,
			2017			2016			2017			2016
Cost of revenues		$	819		$	455		$	1,543		$	861
Sales and marketing			812			492			1,443			927
Research and development			1,033			652			1,978			1,284
General and administrative			2,358			1,258			4,255			2,390
	Total stock-based compensation expenses	$	5,022		$	2,857		$	9,219		$	5,462

^(2)	Includes amortization of acquired technology of $0.9 million and $0.8 million for the three months ended June 30, 2017 and 2016, respectively,
	and $1.8 million and $1.6 million for the six months ended June 30, 2017 and 2016, respectively.

Q2 Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
		Six Months Ended June 30,
			2017			2016
		(unaudited)			(unaudited)
Cash flows from operating activities:
Net loss		$	(14,861	)	$	(19,360	)
Adjustments to reconcile net loss to net cash
used in operating activities:
	Amortization of deferred implementation, solution and other costs		3,514			3,192
	Depreciation and amortization		7,227			5,871
	Amortization of debt issuance costs		28			48
	Amortization of premiums on investments		151			221
	Stock-based compensation expenses		9,219			5,462
	Deferred income taxes		234			139
	Other non-cash charges		38			178
	Changes in operating assets and liabilities		(15,810	)		1,860
Cash used in operating activities			(10,260	)		(2,389	)
Cash flows from investing activities:
	Net redemptions (purchases) of investments		(2,119	)		341
	Purchases of property and equipment		(7,625	)		(8,745	)
	Business combinations and asset acquisitions, net of cash acquired		(3,816	)		(95	)
	Capitalization of software development costs		(762	)		(1,190	)
	Purchases of intangible assets		-			(138	)
	Increase in restricted cash		(1,600	)		-
Cash used in investing activities			(15,922	)		(9,827	)
Cash flows from financing activities:
	Payments on financing obligations and capital leases, net		-			(5,051	)
	Proceeds from issuance of common stock		5,780			2,744
Net cash provided by (used in) financing activities			5,780			(2,307	)
Net decrease in cash and cash equivalents			(20,402	)		(14,523	)
Cash and cash equivalents, beginning of period			54,873			67,049
Cash and cash equivalents, end of period		$	34,471		$	52,526

Q2 Holdings, Inc.
Reconciliation of GAAP to Non-GAAP Measures
(in thousands)
		Three Months Ended June 30,						Six Months Ended June 30,
			2017			2016			2017			2016
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
GAAP gross profit		$	23,297		$	17,135		$	45,059		$	33,080
	Stock-based compensation		819			455			1,543			861
	Amortization of acquired technology		912			797			1,798			1,595
Non-GAAP gross profit		$	25,028		$	18,387		$	48,400		$	35,536
Non-GAAP gross margin:
	Non-GAAP gross profit	$	25,028		$	18,387		$	48,400		$	35,536
	GAAP revenue		47,625			36,005			92,159			69,764
Non-GAAP gross margin			52.6	%		51.1	%		52.5	%		50.9	%
GAAP sales and marketing expense		$	11,096		$	9,611		$	20,974		$	17,818
	Stock-based compensation		(812	)		(492	)		(1,443	)		(927	)
Non-GAAP sales and marketing expense		$	10,284		$	9,119		$	19,531		$	16,891
GAAP research and development expense		$	9,922		$	7,830		$	19,573		$	15,733
	Stock-based compensation		(1,033	)		(652	)		(1,978	)		(1,284	)
Non-GAAP research and development expense		$	8,889		$	7,178		$	17,595		$	14,449
GAAP general and administrative expense		$	9,268		$	7,437		$	17,720		$	14,858
	Stock-based compensation		(2,358	)		(1,258	)		(4,255	)		(2,390	)
Non-GAAP general and administrative expense		$	6,910		$	6,179		$	13,465		$	12,468
GAAP operating loss		$	(7,713	)	$	(9,620	)	$	(14,651	)	$	(19,056	)
	Stock-based compensation		5,022			2,857			9,219			5,462
	Acquisition related costs		351			1,476			699			2,958
	Amortization of acquired technology		912			797			1,798			1,595
	Amortization of acquired intangibles		373			368			744			736
	Unoccupied lease charges		-			33			-			33
Non-GAAP operating loss		$	(1,055	)	$	(4,089	)	$	(2,191	)	$	(8,272	)
GAAP net loss		$	(7,821	)	$	(9,708	)	$	(14,861	)	$	(19,360	)
	Stock-based compensation		5,022			2,857			9,219			5,462
	Acquisition related costs		351			1,476			699			2,958
	Amortization of acquired technology		912			797			1,798			1,595
	Amortization of acquired intangibles		373			368			744			736
	Unoccupied lease charges		-			33			-			33
Non-GAAP net loss		$	(1,163	)	$	(4,177	)	$	(2,401	)	$	(8,576	)
Reconciliation of GAAP net loss to adjusted EBITDA:
	GAAP net loss	$	(7,821	)	$	(9,708	)	$	(14,861	)	$	(19,360	)
	Depreciation and amortization		3,702			2,944			7,227			5,871
	Stock-based compensation		5,022			2,857			9,219			5,462
	Provision for income taxes		217			3			353			233
	Interest (income) expense, net		(109	)		85			(143	)		71
	Acquisition related costs		351			1,476			699			2,958
	Unoccupied lease charges		-			33			-			33
Adjusted EBITDA		$	1,362		$	(2,310	)	$	2,494		$	(4,732	)