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QH

Q2 Holdings, Inc. (QTWO)·Q3 2025 Earnings Summary

Executive Summary

  • Q2 Holdings delivered a clean beat-and-raise quarter: revenue $201.7m (+15% YoY; +3% QoQ) and Adjusted EBITDA $48.8m (24.2% margin), both above guidance; GAAP diluted EPS reached $0.23, with non‑GAAP gross margin at 57.9% .
  • S&P Global consensus was topped on revenue ($201.7m vs. $197.8m*) and EPS (Primary EPS $0.64 vs. $0.56*), driven by subscription strength and record Q3 bookings; subscription revenue mix rose to 82% of total .
  • FY25 guidance raised again (revenue to $789–$793m; Adj. EBITDA to $182.5–$185.5m) and Q4 guide initiated (revenue $202.4–$206.4m; Adj. EBITDA $47.2–$50.2m); preliminary FY26 outlook calls for ~13.5% subscription revenue growth, ≥60% GM, and ~250 bps Adj. EBITDA margin expansion .
  • Announced a $150m share repurchase authorization and leadership realignment to accelerate go‑to‑market and AI execution—potential stock catalysts alongside sustained backlog growth to ~$2.5b (+24% YoY) and best-ever third‑quarter bookings .

What Went Well and What Went Wrong

  • What Went Well

    • Record third‑quarter bookings with seven Tier 1/Enterprise wins, including net‑new large-bank logos and major expansions; largest fraud deal in company history closed with a ~$200b AUM customer .
    • Mix shift toward subscription revenue (82%) drove non‑GAAP GM to 57.9% (+190 bps YoY) and Adj. EBITDA to $48.8m (+50% YoY); FCF of ~$37m in Q3 with cash/investments at ~$569m .
    • AI roadmap visibly advancing (AI Copilot, AI‑assisted SDK, LLM‑based support, partner data strategy); “advancements in AI will flow through Q2, not around it,” positioning for monetization and efficiency gains .

  • What Went Wrong

    • Discretionary professional services remain under pressure; non‑subscription revenue faces secular headwinds (e.g., bill pay), with FY26 non‑subscription expected to decline mid‑single digits .
    • Elevated current portion of convertible notes (~$494m) underscores near‑term capital structure work, though management intends to retire debt as part of capital allocation .
    • Churn concentration in Q2 required normalization in 2H; while now improving, it was a mid‑year headwind before stabilizing .

Financial Results

MetricQ1 2025Q2 2025Q3 2025
Revenue ($USD Millions)$189.7 $195.1 $201.7
Revenue YoY Growth %15% 13% 15%
Revenue Seq Growth %4% vs Q4’24 3% vs Q1’25 3% vs Q2’25
GAAP Diluted EPS ($)$0.07 $0.18 $0.23
GAAP Gross Margin %53.2% 53.6% 54.0%
Non-GAAP Gross Margin %57.9% 57.5% 57.9%
Adjusted EBITDA ($USD Millions)$40.7 $45.8 $48.8
Adjusted EBITDA Margin %21.5% 23.5% 24.2%
Free Cash Flow ($USD Millions)$37.8 n/a~$37.0

KPIs and Mix

KPIQ1 2025Q2 2025Q3 2025
Subscription ARR ($USD Millions)$702.4 $716.0 $745.4
Total ARR ($USD Millions)n/an/a$888
Backlog / RPO (Approx., $USD Billions)~$2.3 ~$2.4 ~$2.5
Subscription Revenue Mix % of Totaln/an/a82%
Cash + Investments ($USD Millions)n/a~$532 ~$569

Estimates vs. Actuals (S&P Global)

MetricQ3 2025 ConsensusQ3 2025 Actual
Revenue ($USD Millions)197.8*201.7
Primary EPS (S&P “Primary EPS”) ($)0.561*0.636*

Q4 2025 Outlook vs. S&P Consensus

MetricQ4 2025 Guidance (Midpoint)Q4 2025 Consensus
Revenue ($USD Millions)$204.4 (range $202.4–$206.4) 204.9*
Primary EPS (S&P “Primary EPS”) ($)n/a0.607*

Note: Asterisks (*) denote values retrieved from S&P Global.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Total Revenue ($m)FY 2025$783–$788 $789–$793 Raised
Adjusted EBITDA ($m)FY 2025$177–$181 $182.5–$185.5 Raised
Total Revenue ($m)Q4 2025n/a$202.4–$206.4 Initiated
Adjusted EBITDA ($m)Q4 2025n/a$47.2–$50.2 Initiated
Subscription Rev. GrowthFY 2026~13% (prior framework) ~13.5% Raised
Gross MarginFY 2026n/a≥60% Introduced
Adj. EBITDA Margin ExpansionFY 2026 (YoY)n/a~+250 bps Introduced
3‑yr Avg EBITDA Margin Expansion2024–2026360 bps 450 bps Raised

Earnings Call Themes & Trends

TopicQ1 2025 (Prev)Q2 2025 (Prev)Q3 2025 (Current)Trend
AI/Technology InitiativesNot a central theme in Q1 PRCONNECT showcased innovation; product extensibility elevated Dev Days: AI Copilot, AI-assisted SDK coding, LLM knowledge extension, partner data strategy; “AI will flow through Q2” Accelerating
Risk & FraudRenewals/expansions; focus on fraud solutions Fraud/risk central at CONNECT Largest fraud deal in company history with ~$200b customer Strengthening
Subscription Mix & Gross MarginNon‑GAAP GM 57.9% 57.5% 57.9%; mix 82% subscription Improving mix
Bank M&A Tailwinds——Two Q2 banks acquired; acquirers chose Q2 platform Positive
Innovation Studio—85%+ customer adoption highlighted High‑margin revenue stream; GTM investment; strong growth outlook Expanding
Services/Non‑Subscription——Discretionary services under pressure; FY26 non‑subscription down mid‑single digits Headwind
Churn Dynamics——Q2 churn concentration; 2H normalization expected Stabilizing
Cloud Migration/Cost——Completing by late ’25/early ’26; lever to ≥60% GM in ’26 Margin tailwind

Management Commentary

  • “We delivered strong financial results with revenue and Adjusted EBITDA both above our guidance… best third quarter in company history from a bookings perspective” — Matt Flake, CEO .
  • “Based on our year‑to‑date performance… we are raising our full‑year guidance for revenue and adjusted EBITDA. Our strong balance sheet and cash flow generation give us flexibility to invest in growth, retire debt, and opportunistically execute our $150 million share repurchase program.” — Jonathan Price, CFO .
  • “At this year’s [Dev Days], AI was front and center… AI Co‑Pilot… AI‑assisted coding in our SDK… customer‑facing extension of our internal AI assistant… partner data integration strategy to enable… agentic innovation.” — Matt Flake, CEO .
  • “Single biggest lever [to 60% GM in 2026] is the completion of our cloud migration… exit data centers (depreciation roll‑off) plus elasticity/efficiency in cloud.” — Jonathan Price, CFO .
  • “We signed the largest fraud deal in company history… with an existing $200 billion digital banking customer.” — Matt Flake, CEO .

Q&A Highlights

  • AI adoption/timing: Banks are conservative but engaging; Q2 is aligning solutions to concrete use cases across fraud, cross‑sell, and support; opportunity on both revenue and cost lines, with timing not yet quantified .
  • Bookings seasonality: Strong 2H tilt to Tier 1/Enterprise as planned; record Q3 did not “borrow” from Q4; pipeline remains solid .
  • 2026 subscription growth drivers: ~13.5% outlook driven primarily by booked mix and visibility; M&A upside not explicitly built into subscription base (more in services) .
  • Pricing discipline: No abnormal pricing pressure; Q2 walks from uneconomic deals; maintains premium positioning on functionality .
  • Gross margin levers: ≥60% in 2026 led by cloud migration completion, mix, AI efficiencies, and delivery/support productivity .

Estimates Context

  • Q3 2025: Revenue beat consensus ($201.7m vs. $197.8m*) and S&P Primary EPS beat ($0.636 vs. $0.561*), reflecting stronger subscription mix and backlog conversion. Values retrieved from S&P Global.
  • Q4 2025: Guidance midpoint ($204.4m) is in line with revenue consensus ($204.9m*). No company EPS guidance; consensus EPS is $0.607*. Values retrieved from S&P Global.
  • Potential estimate revisions: FY25 revenue/Adj. EBITDA raised; FY26 framework improved (subscription growth +50 bps; 60% GM; +250 bps EBITDA margin expansion), which may warrant upward adjustments to Outer‑year profitability assumptions (especially gross margin), even as non‑subscription headwinds persist .

Key Takeaways for Investors

  • Beat/raise momentum supported by record Q3 bookings and broad‑based Tier 1/Enterprise traction; backlog now ~$2.5b (+24% YoY), enhancing forward visibility .
  • Mix shift toward recurring revenue (82%) is translating into durable margin expansion (non‑GAAP GM 57.9%; Adj. EBITDA margin 24.2%), with cloud migration set to unlock ≥60% gross margin in 2026 .
  • Risk/fraud remains a major growth vector (largest fraud deal in company history) and showcases tangible AI value; product proof points include 3x more suspected fraud detected via AI‑driven Enhanced Payee Match (launched 2024) .
  • Capital allocation optionality is increasing (robust cash/FCF; $150m repurchase authorization) while management targets debt retirement, organic investments, and selective M&A .
  • Non‑subscription headwinds (e.g., bill pay) and discretionary services softness are likely to continue; investors should anchor on subscription growth and margin trajectory as the core thesis .
  • Bank M&A and core consolidations create incremental RFP opportunities; Q2’s incumbency, integrations, and single‑platform approach are competitive advantages in replacement cycles .
  • Near‑term trading setup: Positive skew from beats, raised FY25, and buyback; medium‑term thesis rests on subscription growth durability, AI/product differentiation, and 2026 margin targets .

Footnote: Asterisks (*) in the estimates tables denote values retrieved from S&P Global.