We Get Reports from “The Q’s” And It’s All Good
Q2 Holdings (QTWO) reported Q3 earnings last night and held a conference call this morning. The initial reaction to the report was somewhat overshadowed by the seemingly small projected revenue contribution from the PrecisionLender (PL) acquisition (estimated to be around $3.5 - $4 million in Q4) relative to the purchase price ($500+ million in cash). But some of those concerns were alleviated on the call. I’m getting ahead of myself. Let’s cover the basics first.
Revenue in Q3 was up 32% to $79.7 million (beating by $440,000) while adjusted EPS of $0.05 beat by $0.02. Management provided full-year 2019 revenue guidance of $314 million (at the midpoint), which is $4 million above consensus and represents 30.5% growth. Adding in PL we get closer to 32% growth. Gross margin was modestly below consensus at 53.6%, likely (hopefully) due to costs associated with getting bigger customers up and running, which isn’t a huge deal (assuming we don’t see step changes in these costs).
Other disclosures include signing of Cloud Lending’s biggest customer, a top-20 financial company that I believe is Credit Karma (100 million members), and a corporate banking deal with a top-five credit union. Registered user growth was up 14.6%, a bit below last year.
By far, analysts on the call were most interested in the PL acquisition and on that note management indicated that the acquired company should deliver around $30 million in revenue in 2020 and is growing at around 50%, with gross margins of 70%, above Q2’s current core. That’s good growth, probably more than was expected. Commentary around how PL is an early-stage company that’s been mostly focused on product development and is just now starting to make a splash in the market and win big contracts illustrates that, while the acquisition price is seemingly high (17x 2020 estimated sales), the supernormal growth rate over the next couple of years and cross-selling potential could mean a great fit.
On the downside management indicated some go-lives will likely push into the first quarter of 2020 because it’s hard for banks and credit unions to get a lot done Thanksgiving through New Year’s. Profit margins will also continue to come under pressure due to ramping up SG&A investments for all acquired solutions, but mostly PL. And there is some softness in bill pay revenue.
Stepping back, we see a compelling growth company here with accelerating growth on the top line, a more robust solution set to cross-sell and attract new customers, including emerging fintech leaders, and still deliver profits (albeit dented due to investments). I think big investors will ultimately find they believe in the huge long-term growth potential and are willing to tolerate the noise that comes with significant M&A activity.
That might not mean a stock that races off to new highs today. In fact, shares were down roughly 8% pre-market before recovering and trading up a few percentage points at mid-day. This is a scarce asset and I like the growth profile and what feels like a reasonable valuation as compared to SaaS peers. Factoring in the PL acquisition and assuming 25% organic growth Q2 could deliver $424 million in revenue in 2020. With an enterprise value (EV) now of just $3.1 billion, shares trade with an EV/forward revenue multiple of 7.3 times. That seems far too cheap to me. The stock should be 20% to 40% above where it is now. BUY.
Quanterix (QTRX) blasted off this morning and is up roughly 25% at mid-day. There’s so much science I could talk about here but that would take 10 pages. If you’re interested in that I highly recommend listening to the Q3 earnings conference call replay. All I’ll say on the science front is that management talked about, with the sensitivity improvements it is making, that it will be possible to get to a point where a dried blood sample from a simple finger prick can be sent through the mail (far easier logistically than liquid samples) and used in an Nf-L test to give patients a quick, non-invasive and complete picture of neuronal health.
Back to the here and now, Quanterix blew past estimates to deliver revenue growth of 41.1% to $14.9 million, beating by $2.3 million. Consumables revenue (44% of total) was up almost 80%, instrument revenue (28% of total) was up 82% and services (28% of total) was up 39%. Gross margins expanded by 5.8% to 51.8%, roughly 1.6% higher than consensus. Management reiterated its target of 40% annual growth for years to come, which they feel is conservative yet isn’t reflected in consensus estimates.
Instrument sales are being driven in part by the launch of the SP-X oncology system, which management previously said it hoped to sell 10 of by the end of the year, and also the HD-X system, which replaces the HD-1 system and is generally easier to use, requires less support from Quanterix, and reduces the risk of messed up samples, which is always a concern for customers. The company moved 20 units in the quarter, slightly less than half of which were trade-ins for the older HD-1 version.
Quanterix also inked a licensing and supply agreement with Siemens Healthineers to create a blood-based Nf-L test, with revenue showing up in 2021.
This is most definitely an early-stage company that few investors know about. But remember it was founded by Dr. David Walt, who has on his long list of credentials the attention-grabbing title of founder of Illumina (ILMN), which has grown into a $43 billion genomic sequencing powerhouse. If Quanterix has a fraction of Illumina’s success, the stock should do quite well (current market cap of $675 million).
As far as the stock goes, I like that shares are blasting higher today. But, we’re in a volatile name here. Before moving back to buy I want to see some follow through. For now, keep holding. HOLD.