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Cloud Stocks: Q2 Holdings Expands TAM with Acquisitions

Posted on Monday, Mar 23rd 2020

The markets are down right now, and it might be a good time to scan for some worthy investments among cloud stocks. FinTech company Q2 Holdings (NYSE: QTWO) qualifies for this list with an average revenue growth rate of 26% for the past five years since it went public. Prior to the crash, it had delivered share price growth of 27% per year.  

Q2 Holdings’ Financials

Q2 Holdings is a secure, cloud-based digital banking solutions company headquartered in Austin, Texas. Its digital banking solutions for deposits, money movement, lending, security, and fraud enable financial institutions to deliver a better financial experience to their account holders. It was founded in 2004 and had raised $41.2 million in funding before going public in 2014. It competitors include Fiserv, Jack Henry & Associates, Fidelity National Information Services, Digital Insight, First Data, and ACI Worldwide.

Fourth quarter revenue grew 29% to $86.8 million, missing analyst estimates of $89.5 million. GAAP net loss was $15.7 million or $0.32 per share. Non-GAAP net income was $19.1 million or $0.38 per share, beating analyst estimates of $0.10.

For the full year 2019, revenue grew 31% to $315.5 million. GAAP net loss was $70.9 million compared to net loss of $35.4 million in 2018.

The company ended the fourth quarter with cash, cash equivalents, and investments of $132.4 million, down from $636.9 million at the end of the third quarter. Cash flow from operations for Q4 was $1.9 million, and it generated free cash flow of approximately $350,000. Operating and free cash flow were offset by approximately $510 million paid for the acquisition of PrecisionLender.

For the first quarter, Q2 Holdings expects to achieve a growth of 29% to 32% and non GAAP revenue of $92 to $94 million. For 2020, it expects non GAAP revenue in the range of $412 to $416 million.

Q2 Holdings’ Acquisitions

2019 was a transformational year for Q2. With the help of its recent acquisitions of PrecisionLender and CloudLending, it has expanded the functionality of its digital banking platform, as well as its customer footprint in the digital banking space. 2019 was also its first full year as a global company, it had big wins in its international geographies. 

Based in Charlotte, North Carolina, PrecisionLender is one of the fastest growing enterprise SaaS providers of data-driven sales enablement, pricing and portfolio management solutions for financial institutions globally. The acquisition of PrecisionLender has enhanced Q2’s capabilities in designing, delivering and operating complex, end-to-end digital banking transformation solutions. You can read about its bootstrapping journey including how it formulated an AI agent Andi in our Entrepreneur Journeys series. PrecisionLender was acquired for $510 million in November 2019.

San Mateo, California-based Cloud Lending is a provider of end-to-end lending and leasing platform and was acquired for $105 million in August 2018. It offers a suite of SaaS applications to help lenders close loans faster and reduce operational inefficiencies through automation and configuration. It is now a subsidiary of Q2 Holdings. It had raised $14 million in funding prior to its acquisition.

Following the PrecisionLender acquisition in November, Q2 has signed multiple deals, including deals with a $15 billion bank in the Southeast and a top-five Canadian bank. It has also signed a major alternative lender in North America to a Cloud Lending contract, the largest Cloud Lending deal in company history.

Q2 Holdings added over 500,000 users in the fourth quarter, ending the year with 14.6 million users on its platform, a year-over-year increase of 14%. Those 14.6 million users moved over $1 trillion through the Q2 platform, compared to $200 billion at the time of its IPO in 2014.

In late 2019, it surpassed 5 million users on CorePro, the Q2 Open platform. It has signed and launched its banking-as-a-service products across several of the industry’s most noteworthy FinTech companies.

It ended 2019 with 414 digital banking customers in production, and 46 of those have more than $5 billion in assets, compared to only a handful at the time of its IPO. Across its entire portfolio, it has one-third of the top 100 U.S. banks on its client list.

Its stock is trading at $55.31 with a market cap of $2.7 billion. It hit a 52-week high of $93.9 in August last year and a 52-week low of $47.17 in March following Covid-19 crash.

Although Q2 is not profitable yet, its acquisitions and high revenue growth rate make it a very interesting company.

This segment is a part in the series : Cloud Stocks


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