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Q2 Holdings, Inc. Announces First Quarter 2018 Financial Results

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Total first quarter revenue of $54.8 million, up 23 percent
year-over-year, and up 6 percent from the previous quarter

Q2
Holdings, Inc.
(NYSE:QTWO), a leading provider of secure,
experience-driven digital banking solutions, today announced results for
its first quarter ending March 31, 2018.

First Quarter 2018 Results

Please note these results reflect the impact from the adoption of ASC
606, Contracts with Customers, effective Jan. 1, 2018.

  • Revenue for the first quarter of $54.8 million, up 23 percent
    year-over-year and up 6 percent from the previous quarter.
  • GAAP gross margin for the first quarter of 50.8 percent, up from 48.9
    percent one year ago. Non-GAAP gross margin for the first quarter of
    54.3 percent, up from 52.5 percent one year ago.
  • GAAP net loss for the first quarter of $6.0 million, which compares to
    a GAAP net loss of $7.0 million for the first quarter of 2017, and
    $5.5 million for the fourth quarter of 2017. Adjusted EBITDA for the
    first quarter of positive $5.0 million, an improvement from positive
    $1.1 million one year ago and positive $4.1 million for the fourth
    quarter of 2017.

"We had a strong start to 2018, sustaining our bookings momentum in what
is typically a seasonally slower quarter," said Matt Flake, CEO of Q2.
"Having just wrapped up our annual client conference, I believe our
customers are generally optimistic about their improving operating
environments. When you combine this with three consecutive quarters of
positive bookings momentum, I believe we are well positioned for solid
growth in 2018."

First Quarter 2018 Highlights.

  • Signed a Top 50 credit union and two Tier 1 banks in the first
    quarter, including a $10 billion bank in the Southeast and a $7
    billion bank in the West.
  • Exited the first quarter with approximately 10.9 million registered
    users on the Q2 platform, representing 22 percent year-over-year
    growth and up 5 percent sequentially.
  • Continued Q2 Open momentum, signing MoneyLion, a savings and
    investment platform with two million customers.

Financial Outlook

Q2 Holdings is providing guidance for its second quarter 2018 as follows:

  • Total revenue of $57.9 million to $58.5 million, which would represent
    year-over-year growth of 22 percent to 23 percent.
  • Adjusted EBITDA of $4.7 million to $5.3 million. GAAP net loss is the
    most comparable GAAP measure to adjusted EBITDA. Adjusted EBITDA
    differs from GAAP net loss in that it excludes things such as
    depreciation and amortization, stock-based compensation,
    acquisition-related costs, interest, income taxes and unoccupied lease
    charges. 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.

Q2 Holdings is providing guidance for the full-year 2018 as follows:

  • Total revenue of $236.5 million to $238.5 million, which would
    represent year-over-year growth of 22 percent to 23 percent.
  • Adjusted EBITDA of $21 million to $23 million. Adjusted EBITDA differs
    from GAAP net loss in that it excludes things such as depreciation and
    amortization, stock-based compensation, acquisition-related costs,
    interest, income taxes and unoccupied lease charges. 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.

Conference Call Details

Date:

    May 3, 2018

Time:

8:30 a.m. EDT

Hosts:

Matt Flake, CEO / Jennifer Harris, CFO

Dial in:

US toll free: 1-833-241-4254

 

International: 1-647-689-4205

Conference ID:

2697347
 

Please join the conference call at least 10 minutes before start time to
ensure the line is connected. A live webcast of the conference call will
be accessible from the investor services section of the Q2 Holdings,
Inc. website at http://investors.q2ebanking.com/.

A replay of the webcast will also be available at this website on a
temporary basis shortly after the call.

About Q2 Holdings, Inc.

Q2 is a leading provider of secure, experience-driven digital banking
solutions headquartered in Austin, Texas. We are driven by a mission to
build stronger communities by strengthening their financial
institutions. Q2 provides the industry's most comprehensive digital
banking platform, enriched through actionable data insights, open
development tools and an evolving fintech ecosystem. We help clients
elevate the experience, drive efficiency and grow faster. To learn more
about Q2, visit www.q2ebanking.com.

Use of Non-GAAP Measures

Q2 uses the following non-GAAP financial measures: 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 loss; and,
non-GAAP net loss. 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 adjusted EBITDA, Q2 adjusts net loss for such things as
interest, taxes, depreciation and amortization, stock-based
compensation, acquisition-related costs, amortization of technology and
intangibles, and unoccupied lease charges. In the case of non-GAAP gross
margin and non-GAAP gross profit, Q2 adjusts gross profit and gross
margin for stock-based compensation and amortization of acquired
technology. 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. In the case of non-GAAP operating loss
and non-GAAP net loss, Q2 adjusts operating loss and net loss,
respectively, for stock-based compensation, acquisition related-costs,
amortization of acquired technology, amortization of acquired
intangibles, and unoccupied lease charges.

These non-GAAP measures 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 positive sales and bookings momentum, increased
activity in the bank market and the effects of the improved economic
environment on banks' decision-making, optimism about our pipeline and
Q2's performance in 2018, 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
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 and new products and services; (b) the risk that the market
for Q2's solutions does not grow as anticipated, in particular with
respect to Tier 1 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; (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 has 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) litigation
related to intellectual property and other matters and any related
claims, negotiations and settlements; and (q) the risks associated with
further consolidation in the financial services industry.

Additional information relating to the uncertainty affecting the Q2
business are contained in Q2's filings with the Securities and Exchange
Commission. These documents are available on the SEC Filings section of
the Investor Services section of Q2's website at http://investors.q2ebanking.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.

       
Q2 Holdings, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
 
March 31, December 31,
2018 2017
(unaudited) (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 255,411 $ 57,961
Restricted cash 2,315 2,315
Investments 38,704 41,685
Accounts receivable, net 16,897 13,203
Contract assets, current portion 336 -
Prepaid expenses and other current assets 4,699 3,115
Deferred solution and other costs, current portion 8,392 9,246
Deferred implementation costs, current portion   3,740     3,562  
Total current assets 330,494 131,087
Property and equipment, net 36,592 34,544
Deferred solution and other costs, net of current portion 16,333 12,973
Deferred implementation costs, net of current portion 8,374 8,295
Intangible assets, net 10,556 12,034
Goodwill 12,876 12,876
Contract assets, net of current portion 5,539 -
Other long-term assets   1,090     1,006  
Total assets $ 421,854   $ 212,815  
 
Liabilities and stockholders' equity
Current liabilities:

Accounts payable and accrued liabilities

$

23,451

$ 29,694
Deferred revenues, current portion   38,344     38,379  
Total current liabilities 63,305 68,073
Convertible notes, net of current portion

175,170

-
Deferred revenues, net of current portion 20,599 28,289
Deferred rent, net of current portion 9,075 9,393
Other long-term liabilities  

360

    438  
Total liabilities 266,999 106,193
Stockholders' equity:
Common stock 4 4
Treasury stock - (855 )
Additional paid-in capital 298,087 259,726
Accumulated other comprehensive loss (163 ) (139 )
Accumulated deficit   (143,073 )   (152,114 )
Total stockholders' equity   154,855     106,622  
Total liabilities and stockholders' equity $ 421,854   $ 212,815  
 
       
Q2 Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands, except per share data)
 
Three Months Ended March 31,
2018 2017
(unaudited) (unaudited)
 
Revenues $ 54,808 $ 44,534

Cost of revenues (1) (2)

  26,977     22,772  
Gross profit 27,831 21,762
 
Operating expenses:
Sales and marketing (1) 10,966 9,878
Research and development (1) 11,157 9,651
General and administrative (1) 10,296 8,452
Acquisition related costs 256 348
Amortization of acquired intangibles   368     371  
Total operating expenses   33,043     28,700  
Loss from operations (5,212 ) (6,938 )
Other income (expense), net   (1,023 )   34  
Loss before income taxes (6,235 ) (6,904 )
Benefit from (provision for) income taxes   187     (136 )
Net loss $ (6,048 ) $ (7,040 )
Other comprehensive loss
Unrealized loss on available-for-sale investments   (24 )   (1 )
Comprehensive loss $ (6,072 ) $ (7,041 )
Net loss per common share:
Net loss per common share, basic and diluted $ (0.14 ) $ (0.17 )
Weighted average common shares outstanding, basic and diluted   42,170     40,630  
 
 
(1) Includes stock-based compensation expenses as follows:
Three Months Ended March 31,
  2018     2017  
Cost of revenues $ 1,015 $ 724
Sales and marketing 1,226 631
Research and development 1,356 945
General and administrative   2,498     1,897  
Total stock-based compensation expenses $ 6,095   $ 4,197  
 
(2) Includes amortization of acquired technology of $0.9
million for each of the three months ended March 31, 2018 and 2017.
 
 
Q2 Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
       
Three Months Ended March 31,
2018 2017
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (6,048 ) $ (7,040 )

Adjustments to reconcile net loss to net cash used in operating
activities:

Amortization of deferred implementation, solution and other costs 2,218 1,719
Depreciation and amortization 3,878 3,525
Amortization of debt issuance costs 123 24
Amortization of premiums on investments 56 69

Amortization of debt discount

1,099 -
Stock-based compensation expenses 6,095 4,197
Deferred income taxes 36 117
Other non-cash charges 22 (6 )
Changes in operating assets and liabilities   (14,582 )   (13,273 )
Cash used in operating activities (7,103 ) (10,668 )
Cash flows from investing activities:
Net redemptions of investments 2,901 2,770
Purchases of property and equipment (5,396 ) (5,361 )
Business combinations and asset acquisitions, net of cash acquired (150 ) (1,316 )
Capitalization of software development costs   -     (532 )
Cash used in investing activities (2,645 ) (4,439 )
Cash flows from financing activities:
Proceeds from issuance of convertible notes, net of issuance costs 223,675 -
Purchase of convertible notes bond hedge (41,699 ) -
Proceeds from issuance of warrants 22,379 -
Proceeds from issuance of common stock   2,843     2,990  
Net cash provided by financing activities   207,198     2,990  
Net increase (decrease) in cash and cash equivalents 197,450 (12,117 )
Cash, cash equivalents, and restricted cash beginning of period   60,276     56,188  
Cash, cash equivalents, and restricted cash end of period $ 257,726   $ 44,071  
 

Reconciliation of cash, cash equivalents, and restricted cash as
shown in the statements of cash flows:

Cash and cash equivalents $ 255,411 $ 42,756
Restricted cash   2,315     1,315  
Total cash, cash equivalents, and restricted cash $ 257,726   $ 44,071  
 
       
Q2 Holdings, Inc.
Reconciliation of GAAP to Non-GAAP Measures
(in thousands, except per share data)
 
Three Months Ended March 31,
2018 2017
(unaudited) (unaudited)
GAAP gross profit $ 27,831 $ 21,762
Stock-based compensation 1,015 724
Amortization of acquired technology   912     885  
Non-GAAP gross profit $ 29,758   $ 23,371  
 
Non-GAAP gross margin:
Non-GAAP gross profit $ 29,758 $ 23,371
GAAP revenue   54,808     44,534  
Non-GAAP gross margin   54.3 %   52.5 %
 
GAAP sales and marketing expense $ 10,966 $ 9,878
Stock-based compensation   (1,226 )   (631 )
Non-GAAP sales and marketing expense $ 9,740   $ 9,247  
 
GAAP research and development expense $ 11,157 $ 9,651
Stock-based compensation   (1,356 )   (945 )
Non-GAAP research and development expense $ 9,801   $ 8,706  
 
GAAP general and administrative expense $ 10,296 $ 8,452
Stock-based compensation   (2,498 )   (1,897 )
Non-GAAP general and administrative expense $ 7,798   $ 6,555  
 
GAAP operating loss $ (5,212 ) $ (6,938 )
Stock-based compensation 6,095 4,197
Acquisition related costs 256 348
Amortization of acquired technology 912 885
Amortization of acquired intangibles   368     371  
Non-GAAP operating income (loss) $ 2,419   $ (1,137 )
 
GAAP net loss $ (6,048 ) $ (7,040 )
Stock-based compensation 6,095 4,197
Acquisition related costs 256 348
Amortization of acquired technology 912 885
Amortization of acquired intangibles   368     371  
Non-GAAP net income (loss) $ 1,583   $ (1,239 )
 

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 reported 42,170 40,630
Weighted-average effect of potentially dilutive shares   1,970     -  
Pro forma diluted weighted-average number of common shares 44,140 40,630
 
Calculation of non-GAAP income (loss) per share:
Non-GAAP net income (loss) $ 1,583 $ (1,239 )

Diluted weighted-average number of common shares (pro forma for
three months ended March 31, 2018)

  44,140     40,630  
Non-GAAP net income (loss) per share $ 0.04   $ (0.03 )
 
Reconciliation of GAAP net loss to adjusted EBITDA:
GAAP net loss $ (6,048 ) $ (7,040 )
Depreciation and amortization 3,878 3,525
Stock-based compensation 6,095 4,197
(Benefit from) provision for income taxes (187 ) 136
Interest (income) expense, net 1,023 (34 )
Acquisition related costs   256     348  
Adjusted EBITDA $ 5,017   $ 1,132  
 

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