Q2 (QTWO) - 2022 Q1 - Quarterly Report

PART I: FINANCIAL INFORMATION This section provides Q2 Holdings, Inc.'s unaudited condensed consolidated financial information, including financial statements, management's analysis, market risk disclosures, and internal controls Item 1. Financial Statements This section presents Q2 Holdings, Inc.'s unaudited condensed consolidated financial statements for Q1 2022, detailing financial position, comprehensive loss, and cash flows Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $225,544 | $322,848 | | Total current assets | $511,590 | $522,450 | | Goodwill | $512,869 | $512,869 | | Total assets | $1,364,104 | $1,385,045 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $171,847 | $168,358 | | Convertible notes, net | $655,809 | $551,598 | | Total liabilities | $917,917 | $814,749 | | Total stockholders' equity | $446,187 | $570,296 | | Total liabilities and stockholders' equity | $1,364,104 | $1,385,045 | Condensed Consolidated Statements of Comprehensive Loss Condensed Consolidated Statements of Comprehensive Loss (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Revenues | $134,071 | $116,520 | | Gross Profit | $60,399 | $53,201 | | Loss from operations | $(21,399) | $(17,513) | | Net loss | $(23,559) | $(25,655) | | Net loss per common share, basic and diluted | $(0.41) | $(0.46) | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,621) | $(5,478) | | Net cash used in investing activities | $(92,809) | $(33,498) | | Net cash provided by financing activities | $131 | $1,971 | | Net decrease in cash, cash equivalents, and restricted cash | $(97,299) | $(37,005) | Notes to Condensed Consolidated Financial Statements - The company is a leading provider of secure, cloud-based digital solutions for financial services providers, delivered primarily via a SaaS model[18] - On January 1, 2022, the company adopted ASU 2020-06, which simplifies accounting for convertible instruments. This resulted in an increase to the convertible notes balance of $114.4 million, a reduction to additional paid-in capital of $157.0 million, and an increase to the accumulated deficit of $42.6 million[85] - As of March 31, 2022, the company had $1.39 billion of remaining performance obligations, representing contracted revenue minimums not yet recognized. Approximately 49% is expected to be recognized as revenue in the next 24 months[34] Revenue by Major Source (in thousands) | Source | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Subscription | $96,584 | $85,071 | | Transactional | $17,049 | $16,283 | | Services and Other | $20,438 | $15,166 | | Total Revenues | $134,071 | $116,520 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2022 financial performance, business overview, and strategic direction, highlighting revenue growth, key operating metrics, and liquidity Overview - Q2 provides secure, cloud-based digital solutions to financial institutions, FinTechs, Alt-FIs, and other brands, enabling them to offer digital banking, lending, and BaaS services[149] - The company delivers most solutions via a SaaS model, with pricing generally based on the number of solutions purchased and the number of registered users or commercial account holders[153] - Q2 believes it is well-positioned to capitalize on the convergence of financial institutions, FinTechs, and Brands, driven by the increasing demand for digital financial services[152][157] Key Operating Measures Key Operating Metrics Comparison | Metric | March 31, 2022 | March 31, 2021 | | :--- | :--- | :--- | | Registered Users | 19.7 million | 18.3 million | | Annualized Recurring Revenue (ARR) | $594.2 million | $493.6 million | - Net revenue retention rate was 119% for the year ended December 31, 2021, compared to 122% for 2020[169] - Annual revenue churn was 5.4% for the year ended December 31, 2021, down from 5.9% in 2020[171] Non-GAAP Financial Measures Reconciliation of GAAP to Non-GAAP Revenue (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | GAAP revenue | $134,071 | $116,520 | | Deferred revenue reduction from purchase accounting | $242 | $528 | | Total Non-GAAP revenue | $134,313 | $117,048 | Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net loss | $(23,559) | $(25,655) | | Adjustments (Stock-based comp, D&A, etc.) | $31,617 | $35,543 | | Adjusted EBITDA | $8,058 | $9,888 | Results of Operations Results of Operations Comparison (in thousands) | Metric | Q1 2022 | Q1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $134,071 | $116,520 | 15.1% | | Cost of revenues | $73,672 | $63,319 | 16.4% | | Gross profit | $60,399 | $53,201 | 13.5% | | Sales and marketing | $25,266 | $19,816 | 27.5% | | Research and development | $31,131 | $26,795 | 16.2% | | General and administrative | $20,568 | $18,834 | 9.2% | | Loss from operations | $(21,399) | $(17,513) | 22.2% | | Net loss | $(23,559) | $(25,655) | -8.2% | - The $17.6 million revenue increase was primarily due to a $16.8 million increase from sales of additional solutions to new and existing customers and growth in Registered Users[203] - Cost of revenues increased by $10.4 million (16.4%) due to higher third-party costs, infrastructure costs to support customer growth, and increased personnel expenses[204] - Total other income (expense), net, improved significantly from an $8.0 million expense in Q1 2021 to a $0.8 million expense in Q1 2022, mainly due to a $6.5 million decrease in non-cash interest expense from the adoption of ASU 2020-06[214] Liquidity and Capital Resources - As of March 31, 2022, principal sources of liquidity were cash, cash equivalents, and investments totaling $413.7 million[220] - Management believes that cash flow from operations and other liquidity sources are adequate to meet cash requirements for the next twelve months[220] Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,621) | $(5,478) | | Net cash used in investing activities | $(92,809) | $(33,498) | | Net cash provided by financing activities | $131 | $1,971 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company outlines its exposure to market risks, including interest rate, foreign currency, and inflation, concluding that these risks are not material - The company does not believe it has material exposure to changes in interest rates due to the short-term nature of its investments and fixed interest rates on its convertible notes[236] - Foreign currency exchange risk exists from operations in India, the United Kingdom, and Australia, but is not considered significant. The company does not currently use derivative instruments for hedging[237][238] - Inflation is not believed to have had a material effect on the business, financial condition, or results of operations[239] Item 4. Controls and Procedures Management evaluated disclosure controls and procedures, concluding they were effective with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[241] - No material changes in internal control over financial reporting occurred during the first quarter of 2022[242] PART II: OTHER INFORMATION This section covers other information including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings The company reports no current legal proceedings that would materially adversely affect its business or financial condition - The company is not presently a party to any legal proceedings that would have a material adverse effect on the company[244] Item 1A. Risk Factors This section refers to previously disclosed risk factors from the Annual Report on Form 10-K, confirming no material changes - There have been no material changes from the risk factors disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[245] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities, use of proceeds, or repurchases during the reporting period - The company reported no unregistered sales of equity securities, no use of proceeds, or no repurchases for the period[246][247] Item 3. Defaults Upon Senior Securities The company reports no defaults upon its senior securities during the period - None[248] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[249] Item 5. Other Information The company reports no information for this item - None[250] Item 6. Exhibits This section provides an index of exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents and certifications - The exhibits filed with the report include certifications from the CEO and CFO pursuant to Sarbanes-Oxley Act Sections 302 and 906, and XBRL Interactive Data Files[253]