Banking software provider Q2 (NYSE:QTWO) fell short of analysts' expectations in Q3 FY2023, with revenue up 7.06% year on year to $155 million. The company's outlook for the full year was close to analysts' estimates with revenue guided to $624 million at the midpoint. Turning to EPS, Q2 Holdings (NYSE:QTWO) made a GAAP loss of $0.40 per share, down from its profit of $0.10 per share in the same quarter last year.
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Q2 Holdings (QTWO) Q3 FY2023 Highlights:
- Revenue: $155 million vs analyst estimates of $155.5 million (small miss)
- EPS: -$0.40 vs analyst expectations of -$0.36 (12.5% miss)
- Revenue Guidance for Q4 2023 is $161.8 million at the midpoint, roughly in line with what analysts were expecting
- Free Cash Flow of $9.28 million, down 14.1% from the previous quarter
- Gross Margin (GAAP): 47.8%, up from 46.2% in the same quarter last year
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 mediocre over the last two years, growing from $126.7 million in Q3 FY2021 to $155 million this quarter.
Q2 Holdings's quarterly revenue was only up 7.06% year on year, which might disappoint some shareholders. Additionally, its growth did slow down compared to last quarter as the company's revenue increased by just $436 thousand in Q3 compared to $1.52 million in Q2 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter's guidance suggests that Q2 Holdings is expecting revenue to grow 10.4% year on year to $161.8 million, in line with the 11.1% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 10.5% over the next 12 months before the earnings results announcement.
ProfitabilityWhat makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Q2 Holdings's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 47.8% in Q3.
That means that for every $1 in revenue the company had $0.48 left to spend on developing new products, sales and marketing, and general administrative overhead. Q2 Holdings's gross margin is poor for a SaaS business and we'd like to see it start improving.
Key Takeaways from Q2 Holdings's Q3 Results Sporting a market capitalization of $1.76 billion, Q2 Holdings is among smaller companies, but its more than $290.8 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
It was good to see Q2 produce free cash flow. Its revenue unfortunately missed analysts' expectations and its full-year revenue guidance slightly missed Wall Street's estimates. Overall, this was a mixed quarter for Q2 Holdings. The stock is up 2.05% after reporting and currently trades at $30.4 per share.
The author has no position in any of the stocks mentioned in this report.