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Summary

  • Leading provider of secure, cloud-based, Software as a Service (SaaS) virtual banking solutions.
  • Enables regional and community financial institutions (RCFIs) to access a robust suite of customer and backend applications.
  • Looks like costs are escalating while the rate of growth of new customers is declining.

Based in Austin, TX, Q2 Holdings (NYSE:QTWO) scheduled a $93 million IPO on the NYSE with a market capitalization of $383 million at a price range midpoint of $12 for Thursday, March 20, 2014.

The full IPO calendar is available at IPOpremium.

Recommendation
The rating on QTWO is buy.

SEC Documents
Manager, Joint managers: J.P. Morgan, Stifel

Co-Managers: RBC Capital Markets, Raymond James, Canaccord Genuity, Needham & Co.

End of lockup (180 days): Tuesday, September 16, 2014

End of 25-day quiet period: Monday, April 14, 2014

Summary

QTWO is a leading provider of secure, cloud-based, Software as a Service (SAAS) virtual banking solutions.

QTWO's solution enables regional and community financial institutions (RCFIs) to access a robust suite of customer and backend applications.

Here's a quick financial summary:

Gross margin declined from 44% (of revenue) in 2011 to 37% in 2013.

Net loss increased from -11% (of revenue) in 2011 to -32% in 2013.

The number of installed customers increased only 12% to 334 in 2013 from 299 in 2012.

It looks like costs are escalating while the rate of growth of new customers is declining.

Valuation

Glossary

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

2013 yr

Cap (MM)

Sls

Erngs

BkVlue

TanBV

in IPO

Q2 Holdings

$384

6.7

-21

5.3

5.3

24%

Conclusion
The rating on QTWO is buy.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

QTWO is a leading provider of secure, cloud-based, Software as a Service virtual banking solutions.

QTWO enables regional and community financial institutions (RCFIs) to deliver a robust suite of integrated virtual banking services and engage more effectively with their retail and commercial account holders who expect to bank anytime, anywhere and on any device.

Market Opportunity

According to a January 2014 report published by Celent entitled "IT Spending in Banking, A North American Perspective," U.S. financial institutions are expected to spend $51.1 billion in 2014 on information technology, or IT.

Of this amount, the report forecasts that these institutions will spend approximately $12.7 billion on new initiatives, heavily focused on enhancing their online, mobile, tablet and other self-service banking capabilities.

Based on QTWO's current prices and virtual banking solutions, QTWO believes that the RCFI market is greater than $3.5 billion annually.

QTWO's current RCFI customers represent less than 3% of the 13,570 federally-insured RCFIs in the U.S.

RCFIs are resource limited

RCFIs, unlike larger national banks, typically operate without all of the resources and personnel required to effectively deploy, manage and enhance their own internally-developed virtual banking service offerings. In addition, RCFIs are having to commit additional time and resources to comply with rapidly changing federal and state rules and regulations and frequent regulatory examinations. These market dynamics are driving greater demand among RCFIs for modern, intuitive virtual banking solutions from leading third-party providers.

Growth Plan

QTWO believes it can capture an increasing portion of the IT spend among RCFIs as QTWO continue to grow its customer base and introduce new solutions.

Regional and Community Financial Institution market
The RCFI market includes over 13,500 banks and credit unions that compete to provide financial services in the U.S.

RCFIs have historically sought to differentiate themselves and build account holder loyalty by providing localized, in-branch banking services and serving as centers of commerce and influence in their communities.

However, account holders increasingly engage with their financial services providers across digital channels rather than in physical branches, making it easier for account holders to access competitive financial services and harder for RCFIs to maintain account holder loyalty.

Innovation in financial services technologies, the proliferation of mobile and tablet devices and evolving consumer expectations for modern and intuitive user experiences are pressuring RCFIs to deliver advanced virtual banking services to successfully compete and grow.

RCFIs, unlike larger national banks, typically operate without all of the resources and personnel required to effectively deploy, manage and enhance their own internally-developed virtual banking offerings.

In addition, RCFIs are required to spend increasing amounts of time and money complying with rapidly changing federal and state rules and regulations and frequent examinations by regulatory agencies.

As a result, RCFIs are challenged to satisfy account holder expectations and compete effectively in what has become a complex and dynamic environment.

These challenges often cause RCFIs to rely on disparate, third-party and internally-developed point systems to deliver virtual banking services. However, many of these systems provide limited features and functionality or can be expensive and time-intensive to implement, maintain and upgrade.

QTWO's Solutions

QTWO's solutions are often the most frequent point of interaction between QTWO's RCFI customers and their account holders.

As such, QTWO purpose-built its solutions to deliver a compelling, consistent user experience across digital channels and drive the success of its customers by extending their local brands, enabling improved account holder retention and creating incremental sales opportunities.

The effective delivery and management of secure and advanced virtual banking solutions in the complex and heavily-regulated financial services industry require significant resources, personnel and expertise.

QTWO provides virtual banking solutions that are designed to be highly configurable, scalable and adaptable to the specific needs of its RCFI customers.

QTWO's solutions deliver to account holders a unified virtual banking experience across online, mobile, voice and tablet channels by leveraging a common platform that integrates its solutions with each other and with its customers' other internal and third-party systems.

In addition, QTWO designs its solutions and its data center infrastructure to comply with stringent security and technical regulations applicable to financial institutions and to safeguard its customers and their account holders through features such as real-time risk and fraud analytics.

Dividend Policy

No dividends are planned.

Intellectual Property

QTWO had one issued patent and one patent application pending in the U.S.

Its issued patent, which expires in March 2028, relates to its intellectual property created to address technology integration challenges for community banks and credit unions.

QTWO uses the software components and methods claimed in this patent to access the data from several different types of RCFIs and to allow it to deliver its online, mobile, tablet, voice and text solutions to their account holders without having to individually integrate each solution with each RCFI's data.

Competition

QTWO has a number of point system competitors, including Digital Insight Corporation (acquired by NCR Corporation), First Data Corporation and ACI Worldwide, Inc. in the online, consumer and small business banking space and Fundtech Ltd., ACI Worldwide, Inc., Clear2Pay NV/SA and Bottomline Technologies (DE), Inc. in the commercial banking space.

QTWO also competes with core processing vendors that provide systems and services such as Fiserv, Inc., Jack Henry and Associates, Inc. and Fidelity National Information Services, Inc.

5% stockholders

Entities affiliated with Adams Street Partners, LLC 36.8%

R.H. "Hank" Seale, III and affiliated entities 28.6%

Entities affiliated with Battery Ventures 18.2%

R. H. "Hank" Seale, III 28.6%

Michael M. Brown 18.2%

Jeffrey T. Diehl 36.8%

Use of proceeds

QTWO expects to net $67 million from its IPO. Proceeds are allocated as follows:

$1.3 million of its net proceeds to repay outstanding principal and accrued interest under QTWO's credit facility with Wells Fargo Bank Association. As of December 31, 2013, the interest rate applicable to the credit facility, which matures on April 11, 2017, was 4.168%.

The balance of the net proceeds working capital and other general corporate purposes, including to finance its growth, develop new or enhanced solutions, fund capital expenditures.

Disclaimer: This QTWO IPO report is based on a reading and analysis of QTWO's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: Q2 Holdings