Q2 Holdings, Inc. - FORM 8-K - EX-99.1 - November 4, 2020

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Exhibit 99.1
FOR IMMEDIATE RELEASE

Q2 Holdings, Inc. Announces Third Quarter 2020 Financial Results

AUSTIN, Texas (Nov. 4, 2020)—Q2 Holdings, Inc. (NYSE:QTWO), a leading provider of digital transformation solutions for banking and lending, today announced results for its third quarter ending September 30, 2020.

GAAP Results for the Third Quarter 2020

•Revenue for the third quarter of $103.8 million, up 30 percent year-over-year and up 6 percent from the second quarter of 2020.

•GAAP gross margin for the third quarter of 44.7 percent, down from 49.3 percent for the prior-year quarter and 45.5 percent for the second quarter of 2020.

•GAAP net loss for the third quarter of $26.7 million, compared to GAAP net losses of $18.6 million for the prior-year quarter and $39.0 million for the second quarter of 2020.

Non-GAAP Results for the Third Quarter 2020

•Non-GAAP revenue for the third quarter of $104.8 million, up 31 percent year-over-year and up 6 percent from the second quarter of 2020.

•Non-GAAP gross margin for the third quarter of 52.5 percent, down from 53.6 percent for the prior-year quarter and 53.9 percent for the second quarter of 2020.

•Adjusted EBITDA for the third quarter of $8.1 million, compared to $5.6 million for the prior-year quarter and $8.1 million for the second quarter of 2020.

For a reconciliation of our GAAP to non-GAAP results, please see the tables below.

"We had a solid quarter across the business, highlighted by delivering new customers to the platform and expansion of our relationships with existing customers," said Matt Flake, Q2 CEO. "We're continuing to see the cross-pollination effect in our portfolio generate high demand as customers look to improve existing experiences and leverage the benefits provided from our comprehensive suite of solutions. As we approach the end of the year and enter 2021, I'm optimistic that the sales environment will begin returning to normal and our highly differentiated portfolio positions us favorably for continued execution."

Third Quarter Highlights

•Launched our treasury onboarding solution, a comprehensive digital onboarding tool for commercial accounts, and cross-sold the solution to a top-50 enterprise bank in the United States.

•Signed a loan pricing solution agreement with a Tier 1, $12 billion financial institution in the United States.

•Signed an Enterprise contract with a top-10 global financial institution for the Q2 CardSwap solution.

•Exited the third quarter with approximately 17.1 million registered users on the Q2 Platform, representing 21 percent year-over-year growth and 5 percent sequential growth from the previous quarter.

"We are pleased to have delivered third quarter results which exceeded the high end of our non-GAAP revenue and adjusted EBITDA guidance," said Jennifer Harris, Q2 CFO. "The revenue and adjusted EBITDA achievement was driven primarily through new customer go-lives, where we had a record number of new digital banking go-lives for a quarter. As anticipated, we observed a decline in gross margin from the second quarter of 2020 due in large part to the reduction in success-based fees derived from our PPP solutions, which were primarily limited to the prior quarter."





Financial outlook

As of November 4, 2020, Q2 Holdings is providing guidance for its fourth quarter of 2020 and revised guidance for its full-year 2020, which represents Q2 Holdings' current estimates of the anticipated impacts of the COVID-19 pandemic on Q2 Holdings’ operations and financial results. The financial information below represents forward-looking, non-GAAP financial information, including an estimate of non-GAAP revenue and adjusted EBITDA. GAAP net loss is the most comparable GAAP measure to adjusted EBITDA. Adjusted EBITDA differs from GAAP net loss in that it excludes items such as depreciation and amortization, stock-based compensation, acquisition-related costs, interest, income taxes, unoccupied lease charges, partnership termination charges, and the impact to deferred revenue from purchase accounting. Q2 Holdings is unable to predict with reasonable certainty the ultimate outcome of these exclusions without unreasonable effort. Therefore, Q2 Holdings has not provided guidance for GAAP net loss or a reconciliation of the foregoing forward-looking adjusted EBITDA guidance to GAAP net loss. However, it is important to note that these excluded items could be material to our results computed in accordance with GAAP in future periods.

Q2 Holdings is providing guidance for its fourth quarter of 2020 as follows:

•Total Non-GAAP revenue of $105.0 million to $107.0 million, which would represent year-over-year growth of 18 percent to 21 percent.

•Adjusted EBITDA of $4.9 million to $6.9 million.


Q2 Holdings is providing guidance for the full-year 2020 as follows:

•Total Non-GAAP revenue of $402.5 million to $404.5 million, which would represent year-over-year growth of 27 percent.

•Adjusted EBITDA of $21.0 million to $23.0 million, representing 5 percent to 6 percent of non-GAAP revenue for the year.


Conference Call Details

Date:     
Thursday, November 5, 2020
Time:
8:30 a.m. EST
Hosts:
Matt Flake, CEO / Jennifer Harris, CFO
Conference ID:4467147
Registration:
http://www.directeventreg.com/registration/event/4467147

Please join the conference call at least 10 minutes early to ensure the line is connected. A live webcast of the conference call and financial results will be accessible from the investor relations section of the Q2 website at http://investors.Q2.com/.

An archived replay of the webcast will be available on this website on a temporary basis shortly after the call.

About Q2 Holdings, Inc.
Q2 is a financial experience company dedicated to providing digital banking and lending solutions to banks, credit unions, alternative finance, and fintech companies in the U.S. and internationally. With comprehensive end-to-end solution sets, Q2 enables its partners to provide cohesive, secure, data-driven experiences to every account holder – from consumer to small business and corporate. Headquartered in Austin, Texas, Q2 has offices throughout the world and is publicly traded on the NYSE under the stock symbol QTWO. To learn more, please visit Q2.com.

Use of Non-GAAP Measures

Q2 uses the following non-GAAP financial measures: non-GAAP revenue; adjusted EBITDA; non-GAAP gross margin; non-GAAP gross profit; non-GAAP sales and marketing expense; non-GAAP research and development expense; non-GAAP general and administrative expense; non-GAAP operating expense; non-GAAP operating income (loss); non-GAAP net income; non-GAAP net income per share; and pro


forma weighted-average diluted number of common shares outstanding. Management believes that these non-GAAP financial measures are useful measures of operating performance because they exclude items that Q2 does not consider indicative of its core performance.

In the case of non-GAAP revenue, Q2 adjusts revenue to exclude the impact to deferred revenue from purchase accounting adjustments. In the case of adjusted EBITDA, Q2 adjusts net loss for such items as interest, taxes, depreciation and amortization, stock-based compensation, acquisition-related costs, unoccupied lease charges, partnership termination charges and the impact to deferred revenue from purchase accounting. In the case of non-GAAP gross margin and non-GAAP gross profit, Q2 adjusts gross profit and gross margin for stock-based compensation amortization of acquired technology, acquisition-related costs, and the impact to deferred revenue from purchase accounting. In the case of non-GAAP sales and marketing expense, non-GAAP research and development expense, and non-GAAP general and administrative expense, Q2 adjusts the corresponding GAAP expense to exclude stock-based compensation. Non-GAAP Operating Expense is calculated by taking the sum of non-GAAP sales and marketing expenses, non-GAAP research and development expense, and non-GAAP general and administrative expense. In the case of non-GAAP operating income (loss), non-GAAP net income (loss), and non-GAAP net income (loss) per share, Q2 adjusts operating loss and net loss, respectively, for stock-based compensation, acquisition-related costs, amortization of acquired technology, amortization of acquired intangibles, unoccupied lease charges, partnership termination charges, and the impact to deferred revenue from purchase accounting, and with respect to non-GAAP net income, amortization of debt discount and issuance costs. In the case of pro forma diluted weighted-average number of common shares outstanding, we adjust the diluted weighted-average number of common shares outstanding by the weighted-average effect of potentially dilutive shares.

There are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. Certain items that are excluded from these non-GAAP financial measures can have a material impact on operating and net income (loss). As a result, these non-GAAP financial measures have limitations and should be considered in addition to, not as a substitute for or superior to, the closest GAAP measures, or other financial measures prepared in accordance with GAAP. A reconciliation to the closest GAAP measures of these non-GAAP measures is contained in tabular form on the attached unaudited condensed consolidated financial statements.

Q2's management uses these non-GAAP measures as measures of operating performance; to prepare Q2's annual operating budget; to allocate resources to enhance the financial performance of Q2's business; to evaluate the effectiveness of Q2's business strategies; to provide consistency and comparability with past financial performance; to facilitate a comparison of Q2's results with those of other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and in communication with our board of directors concerning Q2's financial performance.

Forward-looking Statements

This press release contains forward-looking statements, including statements about: the cross-pollination effect in our portfolio and its ability to generate high demand; customers looking to improve existing experiences and leverage the benefits of our solutions; optimism that the sales environment will begin returning to normal; favorable positioning as a result of our highly differentiated portfolio; and, Q2's quarterly and annual financial guidance. The forward-looking statements contained in this press release are based upon Q2's historical performance and its current plans, estimates, and expectations and are not a representation that such plans, estimates or expectations will be achieved. Factors that could cause actual results to differ materially from those described herein include the adverse impacts of the COVID-19 pandemic on Q2's business operations and on global economic and financial markets, including on Q2's customers, partners and suppliers and employees and business, as well as risks related to: (a) the risk of increased competition in its existing markets and as it enters new sections of the market with Tier 1 customers, new markets with Alt-FIs and fintechs and new products and services; (b) the risk that COVID-19, the elections or other factors continue to negatively impact or disrupt the markets for Q2's solutions and that the markets for Q2's solutions do not return to normal or grow as anticipated, in particular with respect to Tier 1 customers and Alt-FI and fintech customers; (c) the risk that Q2's increased focus on selling to larger Tier 1 customers may result in greater uncertainty and variability in Q2's business and sales results; (d) the risk that changes in Q2's market, business or sales organization negatively impacts its ability to sell its products and services; (e) the challenges and costs associated with selling, implementing and supporting Q2's solutions, particularly for larger customers with more complex requirements and longer implementation processes, including risks related to the timing and predictability


of sales of Q2's solutions and the impact that the timing of bookings may have on Q2's revenue and financial performance in a period; (f) the risk that errors, interruptions or delays in Q2's products or services or Web hosting negatively impacts Q2's business and sales; (g) risks associated with data breaches and breaches of security measures within Q2's products, systems and infrastructure and the resultant harm to Q2's business and its ability to sell its products and services; (h) the impact that a slowdown in the economy, financial markets and credit markets may have on Q2's customers and Q2's business sales cycles, prospects and customers’ spending decisions and timing of implementation decisions, particularly in regions where a significant number of Q2's customers are concentrated; (i) the difficulties and risks associated with developing and selling complex new solutions and enhancements with the technical and regulatory specifications and functionality required by customers and governmental authorities; (j) the risks inherent in technology and implementation partnerships that could cause harm to Q2's business; (k) the difficulties and costs Q2 may encounter with complex implementations of its solutions and the resulting impact on reputation and the timing of its revenue from any delayed implementations; (l) the risk that Q2 will not be able to maintain historical contract terms such as pricing and duration; (m) the risks associated with managing growth and the challenges associated with improving operations and hiring, retaining and motivating employees to support such growth; (n) the risk that modifications or negotiations of contractual arrangements will be necessary during Q2's implementations of its solutions or the general risks associated with the complexity of Q2's customer arrangements; (o) the risks associated with integrating acquired companies and successfully selling and maintaining their solutions; (p) the risks associated with anticipated higher operating expenses in 2020 and beyond; (q) litigation related to intellectual property and other matters and any related claims, negotiations and settlements; (r) the risks associated with further consolidation in the financial services industry; (s) risks associated with selling Q2 solutions internationally; and (t) the risk that Q2 debt repayment obligations may adversely affect its financial condition and cash flows from operations in the future and that Q2 may not be able to obtain capital when desired or needed on favorable terms.

Additional information relating to the uncertainty affecting the Q2 business is contained in Q2's filings with the Securities and Exchange Commission. These documents are available on the SEC Filings section of the Investor Relations section of Q2's website at http://investors.Q2.com/. These forward-looking statements represent Q2's expectations as of the date of this press release. Subsequent events may cause these expectations to change, and Q2 disclaims any obligations to update or alter these forward-looking statements in the future, whether as a result of new information, future events or otherwise.
MEDIA CONTACT:INVESTOR CONTACT:
Beth WilliamsJosh Yankovich
Q2 Holdings, Inc.Q2 Holdings, Inc.
M: 512-293-6013O: 512-682-4463
beth.williams@Q2.comjosh.yankovich@Q2.com





Q2 Holdings, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
September 30, 2020December 31, 2019
(unaudited)(unaudited)
Assets
Current assets:
Cash and cash equivalents$365,201 $100,094 
Restricted cash3,470 3,468 
Investments30,908 32,325 
Accounts receivable, net42,125 22,442 
Contract assets, current portion, net1,111 872 
Prepaid expenses and other current assets9,002 6,354 
Deferred solution and other costs, current portion18,548 15,609 
Deferred implementation costs, current portion10,228 5,171 
Total current assets480,593 186,335 
Property and equipment, net51,590 39,252 
Right of use assets31,067 35,388 
Deferred solution and other costs, net of current portion34,756 29,220 
Deferred implementation costs, net of current portion16,909 15,848 
Intangible assets, net194,340 223,861 
Goodwill462,274 462,023 
Contract assets, net of current portion and allowance19,156 15,189 
Other long-term assets2,826 2,318 
Total assets$1,293,511 $1,009,434 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued liabilities$58,795 $65,976 
Deferred revenues, current portion77,871 57,850 
Lease liabilities, current portion8,389 9,140 
Total current liabilities145,055 132,966 
Convertible notes, net of current portion441,547 424,784 
Deferred revenue, net of current portion32,052 32,954 
Lease liabilities, net of current portion31,836 36,079 
Other long-term liabilities5,763 3,239 
Total liabilities656,253 630,022 
Stockholders' equity:
Common stock5 5 
Additional paid-in capital980,657 622,692 
Accumulated other comprehensive income (loss)(38)14 
Accumulated deficit(343,366)(243,299)
Total stockholders' equity 637,258 379,412 
Total liabilities and stockholders' equity$1,293,511 $1,009,434 


Q2 Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands, except per share data)

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(unaudited)(unaudited)(unaudited)(unaudited)
Revenues (1)
$103,804 $79,702 $293,765 $228,644 
Cost of revenues (2) (3)
57,366 40,447 163,676 117,683 
Gross profit46,438 39,255 130,089 110,961 
Operating expenses:
Sales and marketing (2)
18,403 15,700 54,597 47,371 
Research and development (2)
23,568 19,617 72,168 56,392 
General and administrative (2)
17,563 13,418 53,876 41,357 
Acquisition related costs (4)
818 2,758 (22)7,453 
Amortization of acquired intangibles4,465 912 13,447 3,032 
Partnership termination charges — — 13,244 — 
Unoccupied lease charges (5)
1,468 244 2,136 244 
Total operating expenses66,285 52,649 209,446 155,849 
Loss from operations(19,847)(13,394)(79,357)(44,888)
Other income (expense), net(6,757)(5,206)(19,821)(10,630)
Loss before income taxes(26,604)(18,600)(99,178)(55,518)
Benefit from (provision for) income taxes(116)31 (621)307 
Net Loss$(26,720)$(18,569)$(99,799)$(55,211)
Other comprehensive loss:
Unrealized gain (loss) on available-for-sale investments(52)37 (66)247 
Foreign currency translation adjustment66 (59)14 (68)
Comprehensive loss$(26,706)$(18,591)$(99,851)$(55,032)
Net loss per common share:
Net loss per common share, basic and diluted$(0.50)$(0.39)$(1.95)$(1.21)
Weighted average common shares outstanding, basic and diluted53,574 47,782 51,141 45,519 

(1)    Includes deferred revenue reduction from purchase accounting of $1.0 million and $3.7 million for the three and nine months ended September 30, 2020, respectively.

(2)    Includes stock-based compensation expense as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Cost of revenues$2,110 $1,478 $7,422 $4,454 
Sales and marketing2,209 2,060 6,353 5,462 
Research and development2,901 2,598 9,780 7,083 
General and administrative4,376 3,934 13,360 11,536 
Total stock-based compensation expense$11,596 $10,070 $36,915 $28,535 

(3)    Includes amortization of acquired technology of $5.3 million and $1.9 million for the three months ended September 30, 2020 and 2019, respectively, and $16.2 million and $5.5 million for the nine months ended September 30, 2020 and 2019, respectively.

(4) The nine months ended September 30, 2020 includes a $2.9 million reduction to estimated contingent consideration as a result of the actual contingent consideration calculated as of the final measurement date of March 31, 2020.

(5) Unoccupied lease charges include costs related to the early vacating of various facilities, partially offset by anticipated sublease income from these facilities. For the three and nine months ended September 30, 2020, the charges related to facilities in California, North Carolina, and Texas, and for the three and nine months ended September 30, 2019, the charges related to facilities in Georgia.


Q2 Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)

Nine Months Ended September 30,
20202019
(unaudited)(unaudited)
Cash flows from operating activities:
Net loss$(99,799)$(55,211)
Adjustments to reconcile net loss to net cash from operating activities:
Amortization of deferred implementation, solution and other costs13,947 9,670 
Depreciation and amortization38,975 17,728 
Amortization of debt issuance costs1,427 1,004 
Amortization of debt discount15,381 10,150 
Amortization of premiums on investments114 124 
Stock-based compensation expenses38,076 29,376 
Deferred income taxes313 (341)
Other non-cash charges2,522 651 
Changes in operating assets and liabilities(32,935)(14,479)
Net cash used in operating activities(21,979)(1,328)
Cash flows from investing activities:
Net maturities of investments1,252 33,405 
Purchases of property and equipment(16,538)(12,490)
Purchases of intangible assets— (288)
Capitalization of software development costs(653)— 
Net cash provided by (used in) investing activities(15,939)20,627 
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs311,321 195,289 
Proceeds from issuance of convertible notes, net of issuance costs— 307,016 
Purchase of capped call transactions— (40,765)
Proceeds from exercise of stock options to purchase common stock8,568 12,313 
Payment of contingent consideration(16,862)— 
Net cash provided by financing activities303,027 473,853 
Net increase in cash, cash equivalents, and restricted cash265,109 493,152 
Cash, cash equivalents, and restricted cash, beginning of period103,562 110,156 
Cash, cash equivalents, and restricted cash, end of period$368,671 $603,308 



Q2 Holdings, Inc.
Reconciliation of GAAP to Non-GAAP Measures
(in thousands, except per share data)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(unaudited)(unaudited)(unaudited)(unaudited)
GAAP revenue$103,804 $79,702 $293,765 $228,644 
Deferred revenue reduction from purchase accounting957 — 3,720 — 
Non-GAAP revenue$104,761 $79,702 $297,485 $228,644 
GAAP gross profit$46,438 $39,255 $130,089 $110,961 
Stock-based compensation2,110 1,478 7,422 4,454 
Amortization of acquired technology5,255 1,941 16,184 5,514 
Acquisition related costs244 27 735 98 
Deferred revenue reduction from purchase accounting957 — 3,720 — 
Non-GAAP gross profit$55,004 $42,701 $158,150 $121,027 
Non-GAAP gross margin:
Non-GAAP gross profit$55,004 $42,701 $158,150 $121,027 
Non-GAAP revenue104,761 79,702 297,485 228,644 
Non-GAAP gross margin52.5 %53.6 %53.2 %52.9 %
GAAP sales and marketing expense$18,403 $15,700 $54,597 $47,371 
Stock-based compensation(2,209)(2,060)(6,353)(5,462)
Non-GAAP sales and marketing expense$16,194 $13,640 $48,244 $41,909 
GAAP research and development expense$23,568 $19,617 $72,168 $56,392 
Stock-based compensation(2,901)(2,598)(9,780)(7,083)
Non-GAAP research and development expense$20,667 $17,019 $62,388 $49,309 
GAAP general and administrative expense$17,563 $13,418 $53,876 $41,357 
Stock-based compensation(4,376)(3,934)(13,360)(11,536)
Non-GAAP general and administrative expense$13,187 $9,484 $40,516 $29,821 
GAAP operating loss$(19,847)$(13,394)$(79,357)$(44,888)
Deferred revenue reduction from purchase accounting957 — 3,720 — 
Partnership termination charges— — 13,244 — 
Stock-based compensation11,596 10,070 36,915 28,535 
Acquisition related costs1,062 2,784 714 7,550 
Amortization of acquired technology5,255 1,941 16,184 5,514 
Amortization of acquired intangibles4,465 912 13,447 3,032 
Unoccupied lease charges1,468 244 2,136 244 
Non-GAAP operating income (loss)$4,956 $2,557 $7,003 $(13)
GAAP net loss$(26,720)$(18,569)$(99,799)$(55,211)
Deferred revenue reduction from purchase accounting957 — 3,720 — 
Partnership termination charges— — 13,244 — 
Stock-based compensation11,596 10,070 36,915 28,535 
Acquisition related costs1,062 2,784 714 7,550 
Amortization of acquired technology5,255 1,941 16,184 5,514 
Amortization of acquired intangibles4,465 912 13,447 3,032 
Unoccupied lease charges1,468 244 2,136 244 
Amortization of debt discount and issuance costs5,686 5,380 16,808 11,153 
Non-GAAP net income$3,769 $2,762 $3,369 $817 
Reconciliation from diluted weighted-average number of common shares as reported to pro forma diluted weighted average number of common shares
Diluted weighted-average number of common shares, as reported53,574 47,782 51,141 45,519 
Weighted-average effect of potentially dilutive shares2,013 2,560 1,990 2,600 
Pro forma diluted weighted-average number of common shares55,587 50,342 53,131 48,119 
Calculation of non-GAAP income per share:
Non-GAAP net income$3,769 $2,762 $3,369 $817 
Pro forma diluted weighted-average number of common shares 55,587 50,342 53,131 48,119 
Non-GAAP net income per share$0.07 $0.05 $0.06 $0.02 
Reconciliation of GAAP net loss to adjusted EBITDA:
GAAP net loss$(26,720)$(18,569)$(99,799)$(55,211)
Depreciation and amortization12,929 5,932 38,975 17,728 
Stock-based compensation11,596 10,070 36,915 28,535 
(Benefit from) provision for income taxes116 (31)621 (307)
Interest (income) expense, net6,727 5,157 19,586 10,508 
Acquisition related costs1,062 2,784 714 7,550 
Unoccupied lease charges1,468 244 2,136 244 
Deferred revenue reduction from purchase accounting957 — 3,720 — 
Partnership termination charges— — 13,244 — 
Adjusted EBITDA$8,135 $5,587 $16,112 $9,047 



Q2 Holdings, Inc.
Reconciliation of GAAP to Non-GAAP Revenue Guidance
(in thousands)

Q4 2020 GuidanceFull Year 2020 Guidance
LowHighLowHigh
GAAP Revenue$104,314 $106,314 $398,094 $400,094 
Deferred revenue reduction from purchase accounting686 686 4,406 4,406 
Non-GAAP revenue$105,000 $107,000 $402,500 $404,500 


Q2 Holdings, Inc. Reports