When I wrote about Q2 Holdings (NYSE: QTWO) in January as one of the five platform companies I love, it was the only one of the five stocks trailing the market, but that has changed. The company’s 29% growth for full-year 2017 has lifted the stock’s performance, and management’s comments in the most recent earnings call show Q2 Holding’s is just starting.
Read on for how this company — which offers a cloud-based financial solutions platform — is winning and retaining customers, attracting new end-users, growing its product portfolio, and expanding its addressable market.
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1. Winning big deals
Q2 Holdings has won a number of deals to provide digital banking solutions for Tier 1 financial institutions (those having assets greater than $10 billion). Flake was not shy about naming its competitors on the call — including Fiserv, Jack Henry & Associates, and Fidelity National Information Services — that have shown up to compete for these important customers. He indicated that its “singular focus on digital banking” and its integrated platform give his company a competitive advantage over these bigger players, which have products from different developers. The company now serves more than 30 Tier 1 customers.
2. We are retaining customers
High renewal rates kept customer churn at a low 4.9% for 2017. Churn is the percentage of revenue that is lost when customers cancel services or downgrade or terminate their agreement altogether. The company says it uses this metric to “monitor the satisfaction of our digital banking customers.” With the company’s churn rate between 3.5% and 5.1% for the last six years, it’s clear Q2 Holdings is keeping its customers satisfied.
3. End users are adopting our tech
The company has added approximately 400,000 end-users to its platform in the quarter, bringing the total to 10.4 million, a 21% increase from last year. While the company’s customer count is down to 382 customers, from 385 at the end of 2016, having an increase in users shows that the platform is growing in value for its customers. These additional registered users helped contribute to the company’s 23% revenue growth in the fourth quarter and improve gross margins.
4. Customers love Q2 Smart
Q2 Smart, a new product that was rolled out in January 2017, “utilizes machine learning and statistical analysis to unlock actionable customer insights” to help customers grow their businesses. This innovation is an example of how the company is driving revenue growth, and the results have exceeded management’s expectations. Last quarter, the company expected to have 10% of its user base on the tool by the end of the year, but the actual results were double that.
5. Expanding our addressable market
In February, the company announced a deal with Acorns, a financial services platform with more than 3 million customers. This deal builds on the company’s Q2 Open product, which allows tech-savvy companies like Acorns to build their own customer-facing applications using Q2 Holding’s open application programming interface. This win is an affirmation of the company’s technology platform and shows that it can expand beyond its core market of serving regional financial institutions.
The momentum the company is building looks to power its growth for years to come. The company is projecting 2018 revenue growth of 21% to 22%, and CFO Jennifer Harris promised that 2019 will see “no less than 20% year-over-year growth.” With these confident projections, it seems Q2 Holdings has a long runway of growth ahead of it.
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Brian Withers owns shares of Q2 Holdings. The Motley Fool owns shares of and recommends Q2 Holdings. The Motley Fool has a disclosure policy.
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