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Q2 HOLDINGS, INC.

(QTWO)
  Report
Delayed Nyse  -  04:00 2022-09-26 pm EDT
32.02 USD   -3.41%
09/12Citigroup Adjusts Q2 Holdings' Price Target to $63 from $78, Reiterates Buy Rating
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09/06New Study by Q2 Reveals Innovation Gap for Banks and Credit Unions
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08/25Q2 Announces New Philanthropy Fund to Build Strong and Diverse Communities Worldwide
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Q2 HOLDINGS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/04/2022 | 04:31pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our interim condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q and in our other SEC filings, including the audited
consolidated financial statements and the accompanying notes for the fiscal year
ended December 31, 2021, which are included in our Annual Report on Form 10-K,
filed with the SEC on February 16, 2022. In addition to historical condensed
consolidated financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially and adversely from those anticipated in
the forward-looking statements. Please see the section entitled "Special Note
Regarding Forward Looking Statements" above and the risk factors discussed in
our Annual Report on Form 10-K for the year ended December 31, 2021 for a
discussion of the uncertainties, risks and assumptions associated with these
statements. The following discussion and analysis also includes a discussion of
certain non-GAAP financial measures. For a description and reconciliation of the
non-GAAP measures discussed in this section, see "Non-GAAP Financial Measures."

Overview


We are a leading provider of secure, cloud-based digital solutions that
transform the ways in which financial institutions and other financial services
providers engage with account holders and end users, or End Users. We offer our
solutions to financial institutions, financial technology companies, or
FinTechs, alternative finance companies, or Alt-FIs, and other innovative
companies, or Brands, wishing to incorporate banking into their customer
engagement and servicing strategies. Our solutions include a broad and deep
portfolio of digital banking solutions; lending solutions; an open technology
platform, the Q2 Innovation Studio, that accelerates innovation by enabling a
partnership ecosystem on the Q2 platform in which FinTechs and other digital
solution providers can embed their offerings and customers can develop their own
applications; and a comprehensive banking as a service, or BaaS, solution, which
we re-branded as Helix in February 2022, that enables innovative companies to
incorporate banking directly into their products. We purpose-build our platforms
and solutions to enable success for our customers and technology partners by
allowing them to digitize their operations and offerings, differentiate their
brands, and integrate traditional and emerging financial services, ultimately
enhancing End-User acquisition, engagement and retention and improving
operational efficiencies and profitability.

The effective delivery and management of secure and advanced digital solutions
in the complex and heavily regulated financial services industry requires
significant resources, personnel and expertise. We provide digital solutions
that are designed to be highly configurable, scalable and adaptable to the
specific needs of our customers. We design and develop our solutions with an
open platform approach intended to provide comprehensive integration among our
solution offerings and our customers' internal and third-party systems. This
integrated approach allows our customers to deliver unified and robust financial
experiences across digital channels. Our solutions provide our customers the
flexibility to configure their digital services in a manner that is consistent
with each customer's specific workflows, processes and controls. Our solutions
also allow our customers to personalize the digital experiences they deliver to
their End Users by extending their individual services and brand requirements
across digital channels. Our solutions and our data center infrastructure and
resources are designed to comply with the stringent security and technical
regulations applicable to financial institutions and financial services
providers and to safeguard our customers' data and that of their End Users.

We have deep domain expertise in developing and delivering secure, advanced
digital solutions designed to help our customers and technology partners compete
in the complex and heavily regulated financial services industry. Over 17 years
ago, Q2 began by providing digital banking solutions to regional and community
financial institutions. We have rapidly grown since then through a combination
of broad market acceptance of our award-winning solutions and relentless
innovation, investment and acquisitions. Our portfolio of solutions now spans
digital banking, lending, lending profitability, onboarding, security, and we
now serve account holders and borrowers across retail, small business and
commercial segments, in addition to our open technology platform and BaaS
offerings. While we remain focused on our founding mission of building stronger
and more diverse communities by strengthening their financial institutions, we
intend to draw on our broad solution portfolio, deep domain expertise and robust
customer base to lead the transformation into a new frontier of financial
services.

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The financial services industry is undergoing tremendous change, influenced by
three major factors. First, financial institutions demand now, more than ever,
to digitize their operations and offerings, and the COVID-19 pandemic has
further accelerated this digital transformation. Second, the continued growth in
the number of FinTechs and the innovation they bring to the market is increasing
End-User demand and expectations for new, more engaging and meaningful digital
financial experiences. And third, major innovative Brands recognize that
incorporating banking into their strategy is an opportunity to leverage the
trust that their End Users place in them, driving deeper engagement with those
End Users. These three forces are converging to create what we believe is a new
frontier in financial services in which financial institutions, FinTechs and
Brands will have new roles and interdependencies, and which will require new
technology, new partners, and new business models. We believe that lasting value
creation in financial services will be achieved by those companies that can
support and enhance the convergence of these forces. In addition, we have built
a broad set of solutions that we believe equips us to accelerate and optimize
this convergence - from digitizing the entire bank, to facilitating partnerships
among financial institutions and FinTechs, to enabling Brands to incorporate
banking into their products and customer relationships.

We deliver our solutions to most of our customers using a software-as-a-service,
or SaaS, model under which our customers pay subscription fees for the use of
our solutions. Our digital banking platform customers have numerous End Users,
and those End Users can represent one or more account holders registered to use
one or more of our solutions on our digital banking platform. We generally price
our digital banking platform solutions based on the number of solutions
purchased by our customers and the number of Registered Users or commercial
account holders utilizing our solutions. We generally earn additional revenues
from our digital banking platform customers based on the number of transactions
that End Users perform on our solutions in excess of the levels included in our
standard subscription fee. As a result, our revenues from digital banking
platform customers grow as our customers buy more solutions from us and increase
the number of End Users utilizing our solutions and as those users increase
their number of transactions on our solutions. The structure and terms of our
newer lending arrangements vary, but generally are also sold on a subscription
basis through our direct sales organization, and the related revenues are
recognized over the terms of the customer agreements. The structure and terms of
our Helix arrangements with FinTechs and Brands vary, but typically involve
relatively lower contracted minimum revenues and instead emphasize usage-based
revenue, with such revenue recognized as it is incurred.

We have achieved significant growth since our inception. During each of the past
nine years, our average number of Registered Users (as defined below) per
installed customer on our digital banking platform, or Installed Customer, has
grown, and in many instances we have been able to sell additional solutions to
existing customers. Our revenues per Installed Customer and per Registered User
vary period-to-period based on the length and timing of customer
implementations, changes in the average number of Registered Users per customer,
sales of additional solutions to existing customers, changes in the number of
transactions on our solutions by Registered Users and variations among existing
customers and new customers with respect to the mix of purchased solutions and
related pricing. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Key Operating Measures" for additional
detail on how we define "Installed Customers" and "Registered Users."

We believe we have a significant opportunity to continue to grow our business,
and the investments we are making are positioning us to realize revenue growth
and improve our operating efficiencies. These investments will increase our
costs on an absolute dollar basis, but the timing and amount of these
investments will vary based on the rate at which we expect to add new customers,
the implementation and support needs of our customers, our software development
plans, our technology and physical infrastructure requirements and the internal
needs of our organization. Many of these investments will occur in advance of
any associated benefit which at times may make it difficult to determine if we
are effectively allocating our resources. If we are successful in growing our
revenues by increasing the number of customers and scope of our customer
relationships, we anticipate that greater economies of scale and increased
operating leverage will improve our margins over the long term.

We sell our solutions primarily through our professional sales organization.
While the financial institutions market is well-defined due to the regulatory
classifications of those financial institutions, markets for FinTechs, Alt-FIs
and brands are broader and more difficult to define due to the changing number
of providers in each market. Over the long term, we intend to continue to invest
in additional sales representatives to identify and address opportunities in the
financial institution, FinTech, Alt-FI and Brand markets across the U.S. and
internationally and to increase our number of sales support and marketing
personnel, as well as our investment in marketing initiatives designed to
increase awareness of our solutions and generate new customer opportunities.

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We have continuously invested in expanding and improving our digital banking
platform since its introduction in 2005, and we intend to continue investing
both organically and inorganically through acquisitions to expand our portfolio
of solutions. Additionally, over the past several years we have acquired or
developed new solutions and additional functionality that serve a broader range
of needs of financial institutions as well as the needs of FinTechs, Alt-FIs and
Brands. Our integrated, end-to-end collection of solutions includes retail,
small business and commercial banking, regulatory and compliance, digital
lending, relationship pricing, BaaS, digital account opening, account switching
and data-driven sales enablement and portfolio management solutions among
others. We have also introduced the Q2 Innovation Studio, an API-based and
SDK-based open technology platform that allows our financial institution
customers and other technology partners to develop unique extensions of and
integrations to our digital banking platform, allowing financial institutions to
quickly and easily deploy customized experiences and the latest financial
services expected by End Users.

We believe that financial services providers are best served by a broad
integrated portfolio of digital solutions that provide rapid, flexible and
comprehensive integration with internal and third-party solutions allowing them
to provide modern, intuitive digital financial services in a secure,
regulatory-compliant manner. We also believe that the breadth and depth of our
solution offerings and customer base, our open and flexible platform approach,
our position as a leading provider of digital banking solutions to a large
network of financial institutions, and our expertise in delivering new,
innovative, secure and regulatory-compliant digital solutions uniquely position
us to capitalize on the new frontier in financial services. We currently intend
to increase investments in technology innovation and software development as we
enhance our solutions and platforms and increase or expand the number of
solutions that we offer.

We believe that delivery of consistent, high-quality customer support is a
significant driver of purchasing and renewal decisions of our prospects and
customers. To develop and maintain a reputation for high-quality service, we
seek to build deep relationships with our customers through our customer service
organization, which we staff with personnel who are motivated by our common
mission of using technology to help our customers succeed and who are
knowledgeable with respect to the regulated and complex nature of the financial
services industry. As our business grows, we intend to continue to invest in and
grow our services and delivery organization to support our customers' needs,
help them through their digital transformation, deliver our solutions in a
timely manner and maintain our strong reputation.

Recent Events


The COVID-19 pandemic continues to impact the global economy. While there has
been significant economic recovery in certain markets, and demand for our
solutions has rebounded, the recovery is characterized by additional uncertainty
as a result of the disruption caused by the pandemic, including supply chain
constraints in many industries, significant price increases for certain goods
and services, rapid increases in demand as economies re-open, rising interest
rates, increased employee attrition, skilled labor shortages, wage inflation and
businesses and labor markets navigating how they will operate post-pandemic.
This disruption to the macroeconomic environment has been exacerbated by the
general economic and geopolitical uncertainties caused by Russia's invasion of
Ukraine, including increased inflation partially driven by increased energy
costs and disruption, instability and volatility in the global markets. In an
effort to rein in inflation, the Federal Reserve has raised interest rates 2.25%
since January 1, 2022, and is generally expected to raise them further in 2022,
which interest rate increases in turn have caused increasing concerns of a
potential recession triggered as higher interest rates slow down the U.S.
economy. This volatility in interest rates and associated recession concerns
create a challenge for financial institutions in assessing risk in their
existing loan portfolios and in making new lending decisions. Rising interest
rates and recession fears, or an actual recession, also reduce account holder
demand for loans and reduce the creditworthiness of existing borrowers,
resulting in higher credit losses for financial institutions. Financial
institutions may respond to this challenging operating environment by reducing
or delaying purchases of digital solutions. The duration and severity of these
events, and their long-term effects on our customers and general economic
conditions, remain uncertain and difficult to predict. Refer to "Special Note
Regarding Forward Looking Statements" above and "Risk Factors" in our Annual
Report on Form 10-K for the year ended December 31, 2021 and in our other SEC
filings for further discussion of the impact and possible future impacts of the
COVID-19 pandemic and general macroeconomic uncertainty on our business.

Key Operating Measures


In addition to the U.S. generally accepted accounting principles, or GAAP,
measures described below in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Components of Operating Results," we monitor
the following operating measures to evaluate growth trends, plan investments and
measure the effectiveness of our sales and marketing efforts.

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While we believe the pandemic and related re-opening efforts have increased the
importance and prominence of digital financial solutions, the increased economic
uncertainty, reduced economic activity, including consumer and business
spending, and challenges associated with re-opening resulted in delays in
certain purchasing decisions and implementations and contract terminations
during 2020 and 2021. During the second half of 2021, we observed an improved
sales environment relative to 2020 and the first half of 2021, which we
continued to observe through the first half of 2022 and we believe will continue
for the remainder of 2022, although we are assessing what impacts a potential
global macroeconomic slowdown and higher inflation could have on our business
for the remainder of 2022 and into 2023. While we expect we will see an increase
in installed customers, associated Registered Users and annualized recurring
revenue compared to the prior year periods, the duration and impacts of the
COVID-19 pandemic and the geopolitical uncertainties caused by Russia's invasion
of Ukraine, as well as resulting inflation and increasing interest rates,
continue to disrupt any seasonality trends that may otherwise typically be
inherent in our historical operating results.

Installed Customers


We define Installed Customers as the number of customers on live implementations
(or installations) of our digital banking platforms. The average size of our
Installed Customers, measured in both Registered Users per Installed Customer
and revenues per Installed Customer, has increased over time as our existing
Installed Customers continue to add Registered Users and commercial account
holders, buy more solutions from us, and as we add larger financial institutions
to our Installed Customer base. The net rate at which we add Installed Customers
varies based on our implementation capacity, the size and unique needs of our
customers, the readiness of our customers to implement our solutions and
customer attrition, including as a result of merger and acquisition activity
among financial institutions. We had 448, 450 and 414 Installed Customers on our
digital banking platform as of December 31, 2021, 2020 and 2019, respectively.

Registered Users


We define a Registered User as an individual related to an account holder of an
Installed Customer on our consumer digital banking platform who has registered
to use one or more of our digital banking solutions and has current access to
use those solutions as of the last day of the reporting period presented. We
generally price our consumer digital banking platform solutions based on the
number of Registered Users, while our commercial digital banking platform
solutions are based on the number of commercial account holders. As the number
of Registered Users of our solutions increases, our revenues generally tend to
grow. Our average number of Registered Users per Installed Customer grows as our
existing digital banking platform customers add more Registered Users and as we
add larger financial institutions to our Installed Customer base. We anticipate
that the number of Registered Users will grow at a faster rate than our number
of Installed Customers. The rate at which our customers add Registered Users
vary significantly period-to-period based on the timing of our implementations
of new customers, the timing of registration of new End Users and customers
performing inactive account clean-up. We add new Registered Users through both
organic growth from existing customers and from the addition of End Users from
new Installed Customers. Our aggregate number of Registered Users is negatively
impacted to the extent Installed Customers terminate all or a portion of their
arrangements with us. Our Installed Customers had approximately 19.2 million,
17.8 million and 14.6 million Registered Users as of December 31, 2021, 2020 and
2019, respectively. Registered Users as of June 30, 2022 were 20.2 million
compared to 18.8 million as of June 30, 2021.

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Net Revenue Retention Rate


We believe that our ability to retain our customers and expand their use of our
products and services over time is an indicator of the stability of our revenue
base and the long-term value of our customer relationships. We assess our
performance in this area using a metric we refer to as our net revenue retention
rate, which we previously referred to as our revenue retention rate. We
calculate our net revenue retention rate as the total revenues in a calendar
year, excluding any revenues from acquired customers during such year, from
customers who were implemented on any of our solutions as of December 31 of the
prior year, expressed as a percentage of the total revenues during the prior
year from the same group of customers. Our net revenue retention rate provides
insight into the impact on current year revenues of: the number of new customers
implemented on any of our solutions during the prior year; the timing of our
implementation of those new customers in the prior year; growth in the number of
End Users on such solutions and changes in their usage of such solutions; sales
of new products and services to our existing customers during the current year,
excluding any products or services resulting from businesses acquired during
such year and customer attrition. The most significant drivers of changes in our
net revenue retention rate each year have historically been the number of new
customers in the prior year and the timing of our implementation of those new
customers. The timing of our implementation of new customers in the prior year
is significant because we do not start recognizing revenues from new customers
until they are implemented. If implementations are weighted more heavily in the
first or second half of the prior year, our net revenue retention rate will be
lower or higher, respectively. In the first half of 2021, our implementations
were weighted more heavily, and we expect to see a lower net revenue retention
rate in 2022 as a result. Our use of net revenue retention rate has limitations
as an analytical tool, and investors should not consider it in isolation. Other
companies in our industry may calculate net revenue retention rate differently,
which reduces its usefulness as a comparative measure. Our net revenue retention
rate was 119%, 122% and 120% for the years ended December 31, 2021, 2020 and
2019, respectively.

Annualized Recurring Revenue

We believe Annualized Recurring Revenue, or ARR, provides important information
about our future revenue potential, our ability to acquire new clients, and our
ability to maintain and expand our relationship with existing clients. We
calculate ARR as the annualized value of all recurring revenue recognized in the
last month of the reporting period, with the exception of variable revenue in
excess of contracted amounts for which we instead take the average monthly run
rate of the trailing three months within that reporting period. Our ARR also
includes the contracted minimums associated with all contracts in place at the
end of the quarter that have not yet commenced, and revenue generated from
Premier Services. Premier Services revenue is generated from select established
customer relationships where we have engaged with the customer for more
tailored, premium professional services resulting in a deeper and ongoing level
of engagement with them, which we deem to be recurring in nature. ARR does not
include revenue from professional services or other sources of revenue that are
not deemed to be recurring in nature. ARR is not a forecast of future revenue,
which can be impacted by contract start and end dates and renewal rates. ARR
should be viewed independently of revenue and deferred revenue as ARR is an
operating metric and is not intended to be combined with or replace these items.
Our use of ARR has limitations as an analytical tool, and investors should not
consider it in isolation. Other companies in our industry may calculate ARR
differently, which reduces its usefulness as a comparative measure. Our ARR was
$574.2 million, $464.2 million and $400.8 million for the years ended
December 31, 2021, 2020 and 2019, respectively. ARR as of June 30, 2022 was
$615.5 million compared to $526.8 million as of June 30, 2021.

Revenue Churn


We utilize revenue churn, which we previously have referred to simply as churn,
to monitor the satisfaction of our customers and evaluate the effectiveness of
our business strategies. We define revenue churn as the amount of any monthly
recurring revenue losses due to customer cancellations and downgrades, net of
upgrades and additions of new solutions, during a year, divided by our monthly
recurring revenue at the beginning of the year. Cancellations refer to customers
that have either stopped using our services completely or remained a customer
but terminated a particular service. Downgrades are a result of customers taking
less of a particular service or renewing their contract for identical services
at a lower price. We had annual revenue churn of 5.4%, 5.9% and 5.1% for the
years ended December 31, 2021, 2020 and 2019, respectively. Our use of revenue
churn has limitations as an analytical tool, and investors should not consider
it in isolation. Other companies in our industry may calculate revenue churn
differently, which reduces its usefulness as a comparative measure.

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Non-GAAP Financial Measures


In addition to financial measures prepared in accordance with GAAP, we use
certain non-GAAP financial measures to clarify and enhance our understanding,
and aid in the period-to-period comparison, of our performance. We believe that
these non-GAAP financial measures provide supplemental information that is
meaningful when assessing our operating performance because they exclude the
impact of certain categories that our management and board of directors do not
consider part of core operating results when assessing our operational
performance, allocating resources, preparing annual budgets and determining
compensation. Accordingly, these non-GAAP financial measures may provide insight
to investors into the motivation and decision-making of management in operating
the business. Set forth in the tables below are the corresponding GAAP financial
measures for each non-GAAP financial measure. Investors are encouraged to review
the reconciliation of each of these non-GAAP financial measures to its most
comparable GAAP financial measure included below. While we believe that these
non-GAAP financial measures provide useful supplemental information, non-GAAP
financial measures have limitations and should not be considered in isolation
from, or as a substitute for, their most comparable GAAP 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 comparable to
similarly titled measures of other companies due to potential differences in
their financing and accounting methods, the book value of their assets, their
capital structures, the method by which their assets were acquired and the
manner in which they define non-GAAP measures. Items such as the deferred
revenue reduction from purchase accounting, stock-based compensation,
acquisition related costs, amortization of acquired technology, amortization of
acquired intangible assets and unoccupied lease charges can have a material
impact on our GAAP financial results.

Non-GAAP Revenue


We define non-GAAP revenue as total revenue excluding the impact of purchase
accounting. We monitor these measures to assess our performance because we
believe our revenue growth rates would be understated without these adjustments.
We believe presenting non-GAAP revenue aids in the comparability between periods
and in assessing our overall operating performance.

                                                         Three Months Ended June 30,                 Six Months Ended June 30,
                                                           2022                  2021                 2022                  2021
Revenue:
GAAP revenue                                         $      140,309          $ 123,573          $      274,380          $ 240,093
Deferred revenue reduction from purchase
accounting                                                      169                595                     411              1,123
Total Non-GAAP revenue                               $      140,478          $ 124,168          $      274,791          $ 241,216

Non-GAAP Operating Income


We provide non-GAAP operating income excluding such items as deferred revenue
reduction from purchase accounting, stock-based compensation, acquisition
related costs, amortization of acquired technology, amortization of acquired
intangible assets and unoccupied lease charges. We believe excluding these items
is useful for the following reasons:

•Deferred revenue reduction from purchase accounting. We provide non-GAAP
information that excludes the deferred revenue reduction from purchase
accounting. We believe that the exclusion of deferred revenue reduction from
purchase accounting allows users of our financial statements to better review
and understand the historical and current results of our continuing operations.

•Amortization of acquired technology and intangible assets. We provide non-GAAP
information that excludes expenses related to purchased technology and
intangible assets associated with our acquisitions. We believe that eliminating
these expenses from our non-GAAP measures is useful to investors, because the
amortization of acquired technology and intangible assets can be inconsistent in
amount and frequency and significantly impacted by the timing and magnitude of
our acquisition transactions, which also vary in frequency from period to
period. Accordingly, we analyze the performance of our operations in each period
without regard to such expenses.

•Stock-based compensation. We provide non-GAAP information that excludes
expenses related to stock-based compensation. We believe that the exclusion of
stock-based compensation expense provides for a better comparison of our
operating results to prior periods and to our peer companies as the calculations
of stock-based compensation vary from period to period and company to company
due to different valuation methodologies, subjective assumptions and the variety
of award types. Because of these unique characteristics of stock-based
compensation, we exclude these expenses when analyzing the organization's
business performance.

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•Acquisition related costs. We exclude certain expense items resulting from our
evaluation and completion of merger and acquisition opportunities, such as
related legal, accounting and consulting fees, as well as changes in fair value
of contingent consideration and retention expense. We consider these
adjustments, to some extent, to be unpredictable and dependent on a significant
number of factors that are outside of our control. Furthermore, merger and
acquisition activities result in operating expenses that would not otherwise
have been incurred by us in the normal course of our organic business
operations. We believe that providing these non-GAAP measures that exclude
acquisition related costs, allows users of our financial statements to better
review and understand the historical and current results of our continuing
operations, and also facilitates comparisons to our historical results and
results of less acquisitive peer companies, both with and without such
adjustments.

•Unoccupied lease charges. We provide non-GAAP information that excludes
restructuring charges related to the estimated costs of exiting and terminating
facility lease commitments, as they relate to our corporate restructuring and
exit activities. These charges are inconsistent in amount and are significantly
impacted by the timing and nature of these events. Therefore, although we may
incur these types of expenses in the future, we believe that eliminating these
charges for purposes of calculating the non-GAAP financial measures facilitates
a more meaningful evaluation of our operating performance and comparisons to our
past operating performance.

                                                           Three Months Ended June 30,                 Six Months Ended June 30,
                                                             2022                  2021                 2022                  2021
GAAP operating loss                                    $      (23,784)         $ (19,943)         $      (45,183)         $ (37,456)
Deferred revenue reduction from purchase
accounting                                                        169                595                     411              1,123

Stock-based compensation                                       17,517             13,627                  31,536             26,722
Acquisition related costs                                         527              1,294                     530              2,260
Amortization of acquired technology                             5,603              5,604                  11,207             10,761
Amortization of acquired intangibles                            4,422              4,563                   8,844              8,982
Unoccupied lease charges                                          129                812                     537                812
Non-GAAP operating income                              $        4,583          $   6,552          $        7,882          $  13,204


Adjusted EBITDA

We define adjusted EBITDA as net loss before depreciation, amortization, stock-based compensation, acquisition related costs, provision for income taxes, interest and other (income) expense, net, deferred revenue reduction from purchase accounting, loss on extinguishment of debt, and unoccupied lease charges. We believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results for the following reasons:


•adjusted EBITDA is widely used by investors and securities analysts to measure
a company's operating performance without regard to items that can vary
substantially from company to company depending upon their financing, capital
structures and the method by which assets were acquired;

•our management uses adjusted EBITDA in conjunction with GAAP financial measures
for planning purposes, in the preparation of our annual operating budget, as a
measure of our operating performance, to assess the effectiveness of our
business strategies and to communicate with our board of directors concerning
our financial performance;

•adjusted EBITDA provides more consistency and comparability with our past
financial performance, facilitates period-to-period comparisons of our
operations and also facilitates comparisons with other companies, many of which
use similar non-GAAP financial measures to supplement their GAAP results; and

•our investor and analyst presentations include adjusted EBITDA as a supplemental measure of our overall operating performance.


Adjusted EBITDA should not be considered as an alternative to net loss or any
other measure of financial performance calculated and presented in accordance
with GAAP. The use of adjusted EBITDA as an analytical tool has limitations such
as:

•depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future and adjusted EBITDA does not reflect cash requirements for such replacements;

•adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;

•adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;

•adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and

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•other companies, including companies in our industry, might calculate adjusted
EBITDA or similarly titled measures differently, which reduces their usefulness
as comparative measures.

Because of these and other limitations, you should consider adjusted EBITDA together with our GAAP financial measures including cash flow from operations and net loss. The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated (in thousands):


                                                             Three Months Ended June 30,                 Six Months Ended June 30,
                                                               2022                  2021                 2022                  2021
Reconciliation of net loss to adjusted EBITDA:
Net loss                                                 $      (25,222)         $ (30,127)         $      (48,781)         $ (55,782)
Deferred revenue reduction from purchase
accounting                                                          169                595                     411              1,123

Stock-based compensation                                         17,517             13,627                  31,536             26,722
Acquisition related costs                                           527              1,294                     530              2,260
Depreciation and amortization                                    15,027             13,586                  29,946             26,498
Unoccupied lease charges                                            129                812                     537                812
Provision for income taxes                                          340                178                   1,704                313
Loss on extinguishment of debt                                        -              1,513                       -              1,513
Interest and other (income) expense, net                          1,176              8,388                   1,838             16,295
Adjusted EBITDA                                          $        9,663          $   9,866          $       17,721          $  19,754

Components of Operating Results

Revenues


Revenue-generating activities directly relate to the sale, implementation and
support of our solutions within a single operating segment. We derive the
majority of our revenues from subscription fees for the use of our solutions
hosted in either our data centers or with cloud-based services, transactional
revenue from bill-pay solutions, and revenues for customer support and
implementation services related to our solutions. We recognize the corresponding
revenues over time on a ratable basis over the customer agreement term. A small
portion of our revenues are derived from customers which host and manage our
solutions on-premises or in third-party data centers under term license and
maintenance agreements. We recognize the software license revenue once the
customer obtains control of the license and the remaining arrangement
consideration for maintenance revenue over time on a ratable basis over the term
of the software license.

Subscription fees are based on the number of solutions purchased by our
customers, the number of End Users using the solutions and the number of
bill-pay and certain other transactions those users conduct using our solutions
in excess of the levels included in our standard subscription fee. Subscription
fees are billed monthly, quarterly or annually and are recognized monthly over
the term of our customer agreements. The initial term of our digital banking
platform agreements averages over five years, although it varies by customer.
The structure and terms of our newer lending arrangements vary, but generally
are also sold on a subscription basis through our direct sales organization, and
the related revenues are recognized over the terms of the customer agreements.
The structure and terms of our Helix arrangements with FinTechs and Brands vary,
but typically involve relatively lower contracted minimum revenues and instead
emphasize usage-based revenue, with such revenue recognized as it is incurred.
We begin recognizing subscription fees when the control of the service transfers
to the customer, generally when the solution is implemented and made available
to the customer. We recognize revenue for bill-pay transaction services
generated when End Users utilize debit cards integrated with its Q2 CorePro API
or Q2 Biller Direct products in the month incurred based on actual or estimated
transactions. The timing of our implementations varies period-to-period based on
our implementation capacity, the number of solutions purchased by our customers,
the size and unique needs of our customers and the readiness of our customers to
implement our solutions. We recognize any related implementation services
revenues ratably over the initial customer agreement term beginning on the date
we commence recognizing subscription fees. Contract asset balances arise
primarily when we provide services in advance of billing for those services.
Amounts that have been invoiced but not paid are recorded in accounts receivable
or other long-term assets, depending on the timing of expected billing, and in
revenues or deferred revenues, depending on when control of the service
transfers to the customer.

As a result of the economic and operational impact of the COVID-19 pandemic on
our customers, in 2020 and 2021 our bookings, in particular with respect to new
customer agreements, were adversely impacted relative to pre-pandemic levels.
Specifically, we experienced delays and unpredictability in the purchasing
decisions of our customers and prospective customers and a slowing of net new
customer deals, relative to pre-pandemic levels, partially offset by an increase
in cross sales of additional features and functionality to our existing customer
base due to the increased utilization and demand for digital banking solutions
caused by the decreased in-branch operations resulting from the COVID-19
pandemic. However, during the second half of 2021, we observed an improved sales
environment relative to 2020 and the first half of 2021, which we

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continued to observe in the first half of 2022 and we believe we will continue
to observe for the remainder of 2022, although we are assessing what impacts the
current inflationary environment and a potential global macro-economic slowdown
could have on our business for the remainder of 2022 and into 2023. However, our
revenues for 2022 will continue to reflect the negative impact from suppressed
demand from 2020 and the first half of 2021 and the duration and impacts of the
COVID-19 pandemic and the geopolitical uncertainties caused by Russia's invasion
of Ukraine continue to be highly unpredictable and may continue to disrupt any
seasonality trends that may otherwise typically be inherent in our historical
operating results.

Cost of Revenues

Cost of revenues is comprised primarily of salaries and other personnel-related
costs, including employee benefits, bonuses and stock-based compensation, for
employees providing services to our customers. This includes the costs of our
personnel performing implementation, customer support, data center and customer
training activities. Cost of revenues also includes the direct costs of bill-pay
and other third-party intellectual property included in our solutions, the
amortization of deferred solution and services costs, amortization of certain
software development costs, co-location facility costs and depreciation of our
data center assets, debit card related pass-through fees, cloud-based hosting
services, an allocation of general overhead costs, the amortization of acquired
technology intangibles, and referral fees. We allocate general overhead expenses
to all departments based on the number of employees in each department, which we
consider to be a fair and representative means of allocation.

We capitalize certain personnel costs directly related to the implementation of
our solutions to the extent those costs are recoverable from future revenues. We
amortize the costs for an implementation once revenue recognition commences, and
we amortize those implementation costs to cost of revenues over the expected
period of customer benefit, which has been determined to be the estimated life
of the technology. Other costs not directly recoverable from future revenues are
expensed in the period incurred.

We capitalize certain software development costs for those employees who are
directly associated with and who devote time to developing our software
solutions on an individual product basis, including those related to
programmers, software engineers and quality control teams, as well as
third-party development costs. Software development costs are amortized to cost
of revenues when products, upgrades and enhancements are released or made
available over the products' estimated economic lives.

We intend to continue to increase our investments in our implementation and
customer support teams and technology infrastructure to serve our customers and
support our growth. Over the long-term, we expect cost of revenues to continue
to grow in absolute dollars as we grow our business, but to fluctuate as a
percentage of revenues based principally on the level and timing of
implementation support activities, timing of capitalized software development
costs, debit card related pass-through fees, and other related costs.

Operating Expenses


Operating expenses consist of sales and marketing, research and development and
general and administrative expenses. They also include costs related to our
acquisitions and the resulting amortization of acquired intangible assets from
those acquisitions. Over the long term, we intend to continue to hire new
employees and make other investments to support our anticipated growth. As a
result, we expect our operating expenses to increase in absolute dollars but to
decrease as a percentage of revenues over the long term as we grow our business.

During the past twelve months, we experienced an exceptionally challenging
hiring environment, and we have seen and expect to continue to see continued
intense competition for technical talent in the remainder of 2022, which has and
may continue to have the potential to drive increased inflation in the wages we
have to pay to hire and retain qualified employees and the incremental expenses
related to the initial hiring process including an increased utilization of paid
third parties to identify and hire talent. Additionally, while throughout 2021
most of our employees continued to work remotely from home and we suspended most
non-essential business travel and conference participation, during the first
half of 2022 some of these activities, including costs associated with onsite
attendance, resumed and we expect them to continue for the remainder of 2022. As
a result, we anticipate that we will continue to see a gradual increase in
certain costs associated with operating physical locations and facilitating
employee travel during 2022. As we navigate the reopening of our onsite
facilities, we believe employee preferences between remote, hybrid and onsite
attendance are likely to change over time, and we will continue to adapt our
physical facilities and IT infrastructure to accommodate a safe and successful
work experience for our onsite, hybrid and remote employees.

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Sales and Marketing


Sales and marketing expenses consist primarily of salaries and other
personnel-related costs, including commissions, employee benefits, bonuses and
stock-based compensation. Sales and marketing expenses also include expenses
related to advertising, lead generation, promotional events, corporate
communications, travel and allocated overhead.

Sales and marketing expenses as a percentage of total revenues will change in
any given period based on several factors including the addition of newly hired
sales professionals, the number and timing of newly-installed customers and the
amount of sales commissions expense amortized related to those customers.
Commissions are generally capitalized and then amortized over the expected
period of customer benefit.

Research and Development


We believe that continuing to improve and enhance our solutions is essential to
maintaining our reputation for innovation and growing our customer base and
revenues. Research and development expenses include salaries and
personnel-related costs, including employee benefits, bonuses and stock-based
compensation, third-party contractor expenses, software development costs,
allocated overhead and other related expenses incurred in developing new
solutions and enhancing existing solutions.

Certain research and development costs that are related to our software
development, which include salaries and other personnel-related costs, including
employee benefits and bonuses attributed to programmers, software engineers and
quality control teams working on our software solutions, are capitalized and are
included in intangible assets, net on the condensed consolidated balance sheets.
We intend to continue our investments in our software development teams and the
associated technology in order to serve our customers and support our growth.

General and Administrative


General and administrative expenses consist primarily of salaries and other
personnel-related costs, including employee benefits, bonuses and stock-based
compensation, of our administrative, finance and accounting, information
systems, legal and human resources employees. General and administrative
expenses also include consulting and professional fees, insurance and travel. We
expect to continue to incur incremental expenses associated with the growth of
our business and to meet increased compliance requirements associated with
operating as a regulated, public company. These expenses include costs to comply
with Section 404 of the Sarbanes-Oxley Act and other regulations governing
public companies, increased costs of directors' and officers' liability
insurance and investor relations activities.

Acquisition Related Costs


Acquisition related costs include compensation expenses related to milestone
provisions and retention agreements with certain former shareholders and
employees of acquired businesses, which are recognized as earned, changes in
fair value of the contingent consideration related to potential acquisition
earnout payments and various legal and professional service expenses incurred in
connection with merger and acquisition related matters, which are recognized
when incurred.

Amortization of Acquired Intangibles


Amortization of acquired intangibles represents the amortization of intangibles
recorded in connection with our business acquisitions which are amortized on a
straight-line basis over the estimated useful lives of the related assets.

Unoccupied Lease Charges


Unoccupied lease charges include costs related to the early vacating of certain
facilities, partially offset by anticipated sublease income from the associated
facilities.

Total Other Income (Expense), Net


Total other income (expense), net, consists primarily of interest income and
expense, other non-operating income and expense, loss on disposal of long-lived
assets, foreign currency translation adjustment and loss on extinguishment of
debt. We earn interest income on our cash, cash equivalents and investments.
Interest expense consists primarily of the interest from the amortization of
debt discount prior to the adoption of ASU 2020-06, issuance costs, and coupon
interest attributable to our convertible notes issued in February 2018, or 2023
Notes, our convertible notes issued in June 2019, or 2026 Notes, and our
convertible notes issued in November 2020, or 2025 Notes, as well as fees and
interest associated with the letter of credit issued to our landlord for the
security deposit for our corporate headquarters.

Provision for Income Taxes

As a result of our current net operating loss position, current income tax expenses and benefits consist primarily of state income tax expense, deferred income tax expense relating to the tax amortization of recently acquired goodwill and income tax expense from foreign operations.

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