Q2 Holdings (NYSE:QTWO) provides cloud-based digital solutions for small regional banks and credit unions to service their customers. The stock has been on tear, up 60% over the past three years and reporting robust 30%-plus revenue growth for the last two fiscal years and 31% in the most recent quarter. But investors haven't missed the boat, there's still plenty of opportunities for this small-cap stock to grow, including via adding to its customer base, expanding relationships with current customers, and adding new products.

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Adding customers

Q2 Holdings serves regional and community financial institutions (RCFIs) in the U.S. that have under $50 billion in assets; there are about 12,000 of these that are federally insured. At the end of 2016, Q2 Holdings had 385 customers, a mere 3% of the bigger number.

Bar chart of Q2 Holdings customers (385) versus the market of 11,870.

Chart by author; data from Q2 Holdings annual report.

In the past, RCFIs have sought to differentiate themselves with personalized services that focus on the local community. They've had to adapt to customers wanting to perform banking transactions from their smartphones.

As many RCFIs lack the in-house resources to develop a comprehensive and secure IT platform for online banking, Q2 Holdings' cloud-based platform fills this need. Having robust online banking tools allows smaller banks to compete for customers that might choose larger national banks.

The company added multiple larger customers in the most recent quarter. While the company has had success in adding customers this year, the company will end the year slightly down in its customer count due to merger and acquisition activity in its customer base. This fact emphasizes the importance of Q2 Holdings' second growth lever of expanding its relationship with its current customers.

Growing revenue from current customers

Growing revenue from its current customers can happen in two ways: expanding the set of products a customer uses and/or growing a customer's base of account holders. Q2 Holdings has multiple consumer products starting with its base offering, Q2online, which allows a RCFI's account holders to access their accounts through a web browser. Other consumer banking products include remote deposit, text and voice access, and a recently released product simply called "Q2 account open" that allows new customers to open and fund a new account completely online.

When the RCFIs adds new account holders to Q2's digital platform, the company collects a small monthly subscription fee. Q2 Holdings added over 400,000 users in the most recent quarter, which was a 27% increase from the previous year, bringing the number of registered users to almost 10 million.

Woman on smartphone performing online banking transaction.

Image source: Getty Images.

Q2 Holdings also has products for managing large commercial accounts, risk and fraud analytics tools, and payments management tools. The company looks to cross-sell its consumer banking products to commercial customers and vice versa. CEO Matthew Flake said in the company's most recent earnings call that cross-selling is a key element of the company's growth strategy and "our cross-sell team also had a great quarter ... "

While the company has a broad set of products for RCFIs, it has a long track record of creating new products for its customers, which can also be an engine for growth.


Q2 Holdings spent $32.5 million on research and development in 2016, which was a robust 21.6% of revenue. One of the most recent product innovations is Q2 Smart, which enables RCFIs to analyze data that is already collected by the institution such as transaction flows, balance amounts, and online/offline banking use. This tool utilizes machine learning and statistical analysis to look for opportunities for the RCFIs to grow "account holder relationships with targeted offerings based on specific account holder behavior."

This product has been in the market for less than a year and is gaining traction with customers. By year's end, 10% of its customers will be using Q2 Smart, the company estimates. The product has even won an innovation award from the National Association of Federally Insured Credit Unions because of its positive impact on the credit union industry.

Software development will continue to be a mainstay for the company as it's focused on investment in tools that meet the business objectives of its customers.

Q2 Holdings projects the market for digital banking solutions that serve RCFIs to be $3.5 billion annually. With the company's trailing-12-month revenue coming in at $172.6 million, this cloud-based digital banking solutions company has a lot of room to run.

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