Q2 HOLDINGS, INC. 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 otherSEC filings, including the audited consolidated financial statements and the accompanying notes for the fiscal year endedDecember 31, 2021 , which are included in our Annual Report on Form 10-K, filed with theSEC onFebruary 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 endedDecember 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, 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, theQ2 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 inFebruary 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. 33 --------------------------------------------------------------------------------
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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 theU.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. 34 --------------------------------------------------------------------------------
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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 theQ2 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 byRussia's invasion ofUkraine , 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, theFederal Reserve has raised interest rates multiple times sinceJanuary 1, 2022 , and has signaled openness to future interest rate increases in 2022 and beyond if heightened inflation continues to persist. These interest rate increases in turn have caused increasing concerns of a potential recession as higher interest rates slow down theU.S. and global economy. This volatility in interest rates and associated recession concerns can create challenges 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 can reduce account holder demand for loans and can 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 and associated services. During the three months endedSeptember 30, 2022 , we observed a decline in customer demand for discretionary aspects of our solutions, namely professional services, which we believe may be related to the challenging macroeconomic environment. We also observed a decline in transactional revenue from our Helix and payment solutions, resulting from decreased usage. We expect continued pressure on our professional services and transactional revenue into 2023 and until the macroeconomic environment stabilizes or improves. As a result of the continued macroeconomic uncertainty, during the three months endedSeptember 30, 2022 , we implemented certain measures to further manage our expenses, which we expect to continue into the fourth quarter of 2022 and in 2023. The duration and severity of these events, general economic conditions and their long-term effects on us and our customers 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 endedDecember 31, 2021 and in our otherSEC filings for further discussion of the impact and possible future impacts of the COVID-19 pandemic and general macroeconomic uncertainty on our business. 35 --------------------------------------------------------------------------------
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Key Operating Measures
In addition to theU.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.
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 ofDecember 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 ofDecember 31, 2021 , 2020 and 2019, respectively. Registered Users as ofSeptember 30, 2022 were 20.9 million compared to 19.2 million as ofSeptember 30, 2021 .
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 ofDecember 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 endedDecember 31, 2021 , 2020 and 2019, respectively. 36 --------------------------------------------------------------------------------
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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 endedDecember 31, 2021 , 2020 and 2019, respectively. ARR as ofSeptember 30, 2022 was$633.7 million compared to$537.7 million as ofSeptember 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 endedDecember 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.
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 lease and other restructuring charges can have a
material impact on our GAAP financial results.
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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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue:
GAAP revenue $ 144,751 $ 126,736 $ 419,131 $ 366,829
Deferred revenue reduction from purchase
accounting 104 554 515 1,677
Total Non-GAAP revenue $ 144,855 $ 127,290 $ 419,646 $ 368,506
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 lease and other restructuring 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.
•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.
•Lease and other restructuring charges. We provide non-GAAP information that
excludes restructuring charges related to the estimated costs of exiting and
terminating facility lease commitments, partially offset by anticipated sublease
income, any related impairments of the right of use assets as they relate to
corporate restructuring and exit activities, as well as severance and other
related compensation charges associated with eliminating certain positions in
connection with these initiatives to optimally align our resources to the
businesses that will drive the most long-term value. 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.
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Three Months Ended
2022 2021 2022 2021
GAAP operating loss $ (27,091) $ (22,972) $ (72,274) $ (60,428)
Deferred revenue reduction from purchase
accounting 104 554 515 1,677
Stock-based compensation 16,764 14,069 48,300 40,791
Acquisition related costs 352 581 882 2,841
Amortization of acquired technology 5,603 5,604 16,810 16,365
Amortization of acquired intangibles 4,422 4,483 13,266 13,465
Lease and other restructuring charges 5,494 1,244 6,031 2,056
Non-GAAP operating income $ 5,648 $ 3,563 $ 13,530 $ 16,767
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 lease
and other restructuring 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
•other companies, including companies in our industry, might calculate adjusted
EBITDA or similarly titled measures differently, which reduces their usefulness
as comparative measures.
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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
2022 2021 2022 2021
Reconciliation of net loss to adjusted EBITDA:
Net loss $ (27,791)
104 554 515 1,677
Stock-based compensation 16,764 14,069 48,300 40,791
Acquisition related costs 352 581 882 2,841
Depreciation and amortization 15,291 14,082 45,237 40,580
Lease and other restructuring charges 5,494 1,244 6,031 2,056
Provision for income taxes 469 596 2,173 909
Loss on extinguishment of debt - - - 1,513
Interest and other (income) expense, net 137 7,761 1,975 24,056
Adjusted EBITDA $ 10,820 $ 7,304 $ 28,541 $ 27,058 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.
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We continue to monitor the impacts the current inflationary environment and a
potential global macroeconomic slowdown may have on our business for the
remainder of 2022 and into 2023. During the three months ended September 30,
2022 , we observed a decline in customer demand for discretionary aspects of our
solutions, namely professional services, which we believe may be related to the
challenging macroeconomic environment. We also observed a decline in
transactional revenue from our Helix and payment solutions, resulting from
decreased usage. We expect continued pressure on our professional services and
transactional revenue into 2023 and until the macroeconomic environment
stabilizes or improves. However, we believe that our subscription revenue will
grow at a faster rate in 2023 compared to its growth in 2022. The duration and
impacts of the COVID-19 pandemic and associated macroeconomic impacts, including
rising interest rates and historically high inflation, 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 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 primarily 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. Throughout 2021 and into 2022, we experienced an exceptionally challenging hiring environment, and we have seen and expect 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 2022 some of these activities, including costs associated with onsite attendance, resumed. 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 the remainder of 2022. Additionally, 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. As a result of the continued macroeconomic uncertainty, during the three months endedSeptember 30, 2022 , we implemented certain measures to further manage our expenses, which we expect to continue into the fourth quarter of 2022 and in 2023. 41 --------------------------------------------------------------------------------
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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, stock-based compensation 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.
Lease and other restructuring charges
Lease and other restructuring charges include costs related to the early vacating of certain facilities, any related impairment of the right of use assets and ongoing expenses of other vacated facilities, partially offset by anticipated sublease income from the associated facilities, as well as severance and other related compensation charges associated with eliminating certain positions in connection with these initiatives to optimally align our resources to the businesses that will drive the most long-term value.
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 inFebruary 2018 , or 2023 Notes, our convertible notes issued inJune 2019 , or 2026 Notes, and our convertible notes issued inNovember 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. 42 --------------------------------------------------------------------------------
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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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