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Banking software provider Q2 (NYSE:QTWO) reported results ahead of analysts' expectations in Q2 CY2024, with revenue up 11.9% year on year to $172.9 million. The company expects next quarter's revenue to be around $173 million, in line with analysts' estimates. It made a GAAP loss of $0.22 per share, improving from its loss of $0.41 per share in the same quarter last year.
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Q2 Holdings (QTWO) Q2 CY2024 Highlights:
- Revenue: $172.9 million vs analyst estimates of $170.9 million (1.2% beat)
- Adjusted Operating Income: $22.48 million vs analyst estimates of $19.37 million (16% beat)
- EPS: -$0.22 vs analyst estimates of -$0.24 (7.9% beat)
- Revenue Guidance for Q3 CY2024 is $173 million at the midpoint, roughly in line with what analysts were expecting
- The company slightly lifted its revenue guidance for the full year from $689 million to $690.5 million at the midpoint
- Gross Margin (GAAP): 50.2%, up from 47.8% in the same quarter last year
- Free Cash Flow of $34.78 million, up from $6.02 million in the previous quarter
- Market Capitalization: $3.99 billion
Founded in 2004 by Hank Seale, Q2 (NYSE:QTWO) offers software-as-a-service that enables small banks to provide online banking and consumer lending services to their clients.
Banking SoftwareConsumers these days are accustomed to frictionless digital experiences from online shopping to ordering food or hailing a cab. Financial services firms are notoriously risk averse in adopting modern software, often lacking the resources or competency to develop the digital solutions in-house. That drives demand for software as a service platforms that allows banks and other finance institutions to offer the digital services without having to run or maintain them.
Sales GrowthAs you can see below, Q2 Holdings's revenue growth has been sluggish over the last three years, growing from $123.6 million in Q2 2021 to $172.9 million this quarter.
This quarter, Q2 Holdings's quarterly revenue was once again up 11.9% year on year. We can see that Q2 Holdings's revenue increased by $7.38 million quarter on quarter, which is a solid improvement from the $3.39 million increase in Q1 CY2024. This acceleration of growth was a great sign.
Next quarter's guidance suggests that Q2 Holdings is expecting revenue to grow 11.6% year on year to $173 million, improving on the 7.1% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 10.9% over the next 12 months before the earnings results announcement.
Gross Margin & Pricing PowerWhat makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn't cost much to provide it as an ongoing service.
These costs include servers, licenses, and certain personnel, and leverage on them can decide the winners in competitive markets because they determine how much can be invested into new products, sales, and talent.
Q2 Holdings's gross margin is substantially worse than most other software businesses, signaling it has relatively high infrastructure costs and poor pricing power because alternative solutions are available. As you can see below, it averaged a paltry 49.5% gross margin over the last year. Said differently, Q2 Holdings had to pay a chunky $50.48 to its service providers for every $100 in revenue.
Q2 Holdings's gross profit margin came in at 50.2% this quarter, marking a 2.4 percentage point increase from 47.8% in the same quarter last year. Q2 Holdings's full-year margin has also been trending up over the past 12 months, increasing by 2.7 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).
Key Takeaways from Q2 Holdings's Q2 Results It was encouraging to see Q2 Holdings narrowly top analysts' revenue expectations this quarter. We were also glad its gross margin improved and it slightly raised its full-year revenue guidance. Zooming out, we think this was a decent quarter, showing the company is staying on target. The stock traded up 2.6% to $69.25 immediately following the results.
