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Why the Market Liked Q2 Holdings' Earnings Report

By Jeremy Bowman, Jason Hall, and Vicki Hutchison – Nov 14, 2021 at 4:04PM

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The company beat revenue estimates and eked out a profit.

Q2 Holdings (QTWO 2.82%) isn't as flashy as some other software-as-a-service stocks and doesn't get much attention from Wall Street. However, investors may want to take a closer look at the stock following the recent earnings report.

As Fool contributors Vicki Hutchison and Jason Hall explain in this episode of "Beat and Raise," recorded on Nov. 4, the stock looks well-positioned to take advantage of an environment where interest rates are rising.

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Vicki Hutchison: Q2 Holdings. Another, I think, a little bit less well known company. They've got about a four-billion-dollar market cap. They play in the banking industry , but as a provider, they call it Banking as a Service. I don't know. Everybody likes as a service, but they are building digital solutions, they help with loans. Their customer focus is on the smaller, the community banks, the regional banks, those who can't pay up for a unique individual solution.

This was a good quarter for them and investors liked it. The stock is up about 12 percent today, which is really good and will help a lot with what we see down here in the bottom corner of the screen, was down 13 percent over the last year. Although it looks a little bit of like a sine wave up and down. They beat their revenue expectation, up 22 percent year over year. They missed the earnings per share by a penny. There's not a lot of earnings here, but it is positive, we like a positive, and they did increase their outlook a little bit. I think that the reason that investors don't like this one as much is because the growth is a lot less. When you look at a lot of Software as a Service businesses, the revenue goes up 50 percent, 80 percent, the margins are high, even if they don't make.

This one does make a little money. Their gross margin is 45 percent, that's below the line for some of those high growth investors. They're growing slowly, increasing the number of registered user. A user is someone at a bank that uses a service. They have a lot smaller number of customers, but their registered users are up 12 percent year over year to 19.2 million. They have a decent amount of cash on the balance sheet. Just a steady, slow-growing performer. Someday, maybe they'll make enough to generate a dividend. But as I think the community banks, the regional banks will do better as interest rates rise a little bit.

Jason Hall: Right.

Vicki Hutchison: Q2 will follow that.

Jason Hall: I think that's OK and I think that's important to hit on Vicki. That's their target customers, smaller local, regional banks. A lot of times the banks, they're not a Bank of America that have massive resources and departments to build digital banking platforms. They can leverage this company to manage a lot of those things for them. They're very, very risk-averse. [laughs] These are banks, they manage risk for a living. They're not going to jump out and make a big investment and sign a big partnership with these things, there's a lot of testing. I think you're right, I think as their bottom lines improve with interest rates over time, that's a good trend for this business. That's for sure.

Vicki Hutchison owns shares of Q2 Holdings. The Motley Fool owns shares of and recommends Q2 Holdings. The Motley Fool has a disclosure policy.

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