Q2 Holdings (QTWO 5.64%) is having a fantastic 2019. It's setting records in key metrics, it's winning large deals, and its stock is up 70% year to date. Even with this success, this cloud-software platform for small regional banks is aggressively expanding through acquisitions. Find out what this fintech company has been up to and how it's setting the stage for even more growth.
Performance hitting multiple record highs
In early November, the company released its Q3 2019 financials with four key metrics hitting all-time highs: quarterly revenue, registered users, bookings, and backlog. Revenue grew 32% year over year to almost $80 million, marking the fourth consecutive quarter of 30%-plus revenue growth. Savvy investors also noted that growth accelerated from its 21% year-over-year increase from the previous Q3.
|
Metric |
Q3 2018 |
Q4 2018 |
Q1 2019 |
Q2 2019 |
Q3 2019 |
|---|---|---|---|---|---|
|
Revenue |
$60.5 million |
$67.2 million |
$71.3 million |
$77.6 million |
$79.7 million |
|
YOY revenue growth |
21% |
30% |
30% |
33% |
32% |
|
Registered users |
12.3 million |
12.8 million |
13.1 million |
13.6 million |
14.1 million |
Note: YOY = year over year. Source: Q2 Holdings Earnings Releases.
Registered users on Q2's software platform are the clients of small regional banks and credit unions. Registering provides them access to their financial accounts through mobile apps or desktop web browsers. Each user adds incremental revenue beyond the base subscription fees banks pay to use the platform. This is one of Q2's growth strategies to drive more revenue from current customers. Registered users grew a healthy 14.6% from the same quarter last year to a record 14.1 million.
Bookings represent the total value of new or renewal contracts signed in the quarter. The record bookings this quarter added to the company's total backlog, bringing it to a record $954 million. Backlog represents the total value of all current customer contracts out through the end of their term. It's impressive that it has 3.2 years of sales commitments, using the current $296 million of trailing-12-months revenue as a base. That calculation is even before adding on new deals or additional sales with existing banks.
In addition to record-setting financial performance, Q2 closed a number of important deals.
Winning large customers
In the most recent earnings call, CEO Matt Flake stated that Q2 extended its streak to nine consecutive quarters of winning one "Tier 1" customer. It defines a Tier 1 customer as a bank that has more than $5 billion in assets under management. This streak highlights the strength of the company's core banking products as compared with those of its competitors, but another win has long-term investors more excited.
This fintech has more than 14 million registered users on its banking software platform. Image source: Getty Images.
Management discussed a deal with Credit Karma, a credit-monitoring service, which has more than 100 million members. It wanted to provide free high-yield savings accounts to its customers and is using the banking-as-a-service Q2 Open product and a Q2 customer community bank to create the offering. This deal shows that Q2's technology is becoming recognized in the industry for its ability to power financial technology solutions beyond its core platform.
There have also been a number of wins from two of its recent acquisitions.
Lending solutions as a new growth engine
Q2 acquired Cloud Lending, Inc., a private cloud-based lending and leasing company, last August for $107 million in cash. In October, Q2 strengthened this offering by purchasing Precision Lending, a cloud-based coaching and analytics tool for commercial lenders to make better loans for $510 million in cash. These two companies expand its product set and provide a foothold in international markets. More good news is that these acquisitions are already starting to pay off by landing several large banking institutions in the last quarter.
On the most recent conference call, Flake said that Cloud Lending attracted "one of the world's top 20 financial services providers ... [and] is the largest deal in Cloud Lending's history." The new customer indicated it's replacing its homegrown software, which will now allow it to connect with Salesforce.com's software.
Precision Lending won two large banking enterprises with more than $20 billion in assets. Management announced it is ahead of pace for expected revenue this year, which gave CFO Jennifer Harris confidence that it will achieve revenue in the mid-$30 million range for 2020, representing 50% growth for the newly acquired organization.
Even better news is that these acquisitions bring new customers into the Q2 fold and the opportunity to cross-sell its core products to fuel growth in the years ahead.
The bottom line for investors
What's not to like about record-setting financial metrics, winning large customers, and expanding its platform? This fintech company is having an incredible year and unlocking opportunities to power future growth. Investors might be worried that they've missed the boat, but that's not the case. Q2 has a huge $10 billion addressable market, with only $316.5 million to $319 million projected for full-year 2019 revenue. It has plenty of runway to grow for years to come.
