QIS.v - Quorum Information Technologies

[Southpaw]

Long time Corner of BRK & FFH lurker and first time poster here...I don't believe Quorum (QIS.v) has been discussed on any threads so I'm starting this one. Curious if anyone has done due diligence on them. Below are a summary of my notes. Happy to answer questions best I can, if anyone is interested. Thanks.

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Quorum Information Technologies (http://quorumis.com/) is a nano-cap software company ($12.5 mm market cap and $11.0 mm enterprise value fully diluted at $.30 CAD) that sells ERP software for auto dealers in Canada and the United States.  Their software is referred to as Dealer Management System (DMS) software in the industry and it covers everything from inventory management and sales assistance, to service center workflows.  In other words, anything an employee at a dealership might do or document is captured electronically through the DMS.  This software understandably requires collaboration/integration with the auto OEM, which makes barriers to entry higher as the OEMs typically like to only work with a few “certified” partners.  Quorum’s DMS platform called XSELLERATOR also provides integration with many other third parties, such as the consumer credit bureaus and various financing partners. It is a pure subscription revenue model with Quorum charging ~$2,000/month per dealership, making revenue visibility very high given historical churn of only ~1.5%.

 

The industry is dominated by two players, CDK (a public spin-off from ADP), and Reynolds & Reynolds, a private company.  It’s our understanding that these two players make up approximately 80% of the 20,000 North American franchised rooftops.  AutoNation attempted to partner with Microsoft in 2008 to aggressively compete with these two giants, but gave up after a few years and AutoNation is now a CDK customer.  With Quorum at ~300 rooftops, their share is around 1.5%, and there are several other smaller players like Quorum.  For instance, Serti, claims to have 700 rooftops and operates primarily out of Canada.  In terms of smaller Canada players, we believe Serti is closest in size to Quorum, although management claims Serti plays in smaller dealerships generally while Quorum is in the larger Class-A type of (more stable) dealerships.  Quorum does claim to have 25% market share of Canada GM Dealerships.

 

There is not a lot of “greenfield” opportunity in the industry, as most existing dealers already have installed some kind of DMS system and there is not a lot of total dealership growth.  Low industry growth notwithstanding, we believe the current competitive landscape is less aggressive than it has ever been, as both CDK and Reynolds & Reynolds are essentially going into low growth harvest mode.  After it spun off from ADP, CDK announced a massive margin expansion initiative that will coincide with major cost cutting and lower growth.  It’s our understanding R&R is already deep into that process, generating very high margins (52% EBITDA margins) but low growth.  While we believe the giants will be protective of their current customer base, there is also much less risk of aggressive price competition with Quorum’s existing customer base, something that is usually a smaller competitor’s biggest fear.

 

Here are key points to my investment thesis:

 

+ Existing Customer Base: The recurring revenue stream from Quorom’s ~300 auto dealers is sticky (~1.5% churn) and high margin (90% incremental margin), and is worth at least 2x the current EV, ignoring growth opportunities and cross-selling.  I think downside is limited given this solid recurring revenue foundation available at an EV multiple of only ~1.1x when the median software company is at 8x EV/recurring maintenance revenue. 

 

+ Market Share Grab in 2016: DealerTrack is exiting the Canadian market and its 125 dealerships will be up for grabs for Quorum to compete for. Every existing Dealertrack subscriber in Canada will need to be transitioned by the end of 2016.  Quorum believes they can capture a solid percentage of these rooftops and is targeting 35-40 additional rooftops in 2016 alone (vs. 25 in 2015 and 11 in 2014), a number that could prove conservative. 

 

+ Rapidly Expanding TAM: The company spent a lot of capex dollars developing integration capability for Ford and Toyota, and will add Nissan and Volkswagen in 2016, resulting in a substantial opportunity to capture additional market share. We are seeing the beginnings of this already as last quarter’s “net new revenue” hit levels not seen in years, indicating switching on more new rooftops than in previous quarters.  This could continue throughout the year and throughout at least 2016, as management has significant visibility into their opportunity set.

 

+ Training/Analytics Business: Significant high margin training and analytics (~60% operating) business will add to cash flow as the Canadian government is subsidizing the training through at least 2018.  Revenue from this initiative (which they recently started reporting separately as it has become more material) will double this year compared to last year.  This can conservatively add $1 million in revenue, and $500k-$600k in incremental FCF going forward.

 

+ Underlying FCF/Valuation:  Underlying FCF can triple from 2014 to 2015 (from a small base) to over $1 million CAD, even though it will show up as being relatively flat, as a $500k payment to Microsoft that should have been paid in 2014 is actually paid in 2015.  After factoring this in and looking at maintenance capex versus expansion capex with additional OEMs, the stock is yielding nearly 18% on its underlying 2016 FCF and trades at about 1x EV/Recurring 2016 revenue, which is bottom of the barrel for any software stock.  The underlying FCF would be substantially higher to a strategic buyer who could cut some corporate G&A costs.  A takeout is possible from any number or larger competitors or private equity buyers (Serti, DealerSocket (owned by Vista Private Equity), CDK, or Reynolds & Reynolds).

 

In summary we are getting a mission critical software provider at ½ its theoretical run-off, no-growth scenario value due to the high margin maintenance revenue. Quorum is a terrific asset-light, low cap-ex business with a nice net cash balance sheet. It has sticky recurring revenue with accelerating growth and free cash flow that should inflect materially higher in the next few years as they are hitting their groove and showing operating leverage. I think buying QIS.v anywhere near its current market price of $0.32 has fairly limited downside and multi-bagger upside potential over the next few years.

 

 

[misterkrusty]

interesting.  how are they able to compete with CDK and R&R, who are vastly larger, can devote more $ to R&D, etc.?  what's their niche?

[Southpaw]

Thanks for the question.

 

To some degree, this is an obvious disadvantage.  They spend about $700-$800k a year in what I would call their core update R&D (2 releases a year).  CDK spends...a lot more.

 

However, a few points on this.

 

1) After speaking with a customer (and the CEO), it's my understanding that CDK and ReyRey's technology came from a different time, pre-Windows.  Verbatim:  "a key advantage for Quorum is their technology.  Large incumbents built their system pre-Windows, which is real dinosaur tech that they've been taping and tacking on ever since."

 

An example I got was that everything had to be "batched" as opposed to being updated in real time.  Imagine having to check your Gmail via a batch process at night.  Slight exaggeration, but that's the general idea.

 

Thus, I think their developmental resources aren't as efficient as Quorom's.

 

2) The customer also talked about how the software at CDK and ReyRey is more siloed.  In other words, you might have a unit that only covers Parts workflows, and another that covers Services, and another separate CRM.  He claimed he would have to key in the same data over and over across systems, whereas Quorum's system is integrated.

 

Again, speaks to R&D efficiency.  I imagine at CDK there are different separate units of R&D, versus one consolidated one.

 

3) Quorum is US/Canada only.  Everything I've heard is "Europe/Asia are different animals" and require unique integration per OEM.  Quorum has been extremely focused in the past around GM/Chrysler, and specifically in the US/Canada.  Now this may change a bit as they roll out to Toyota Canada and US/Canada Ford (and then Nissan/Volkswagen), which is a risk, but up until now they've been very focused.

 

Net-net, it's undoubtedly a challenge, but their more modern architecture, integration, and focus helps them compete in my view.

 

4) I also think CDK in particular hasn't paid much attention to Canada.  It's a small % of revenues and hasn't really been growing.

[Southpaw]

I should also add that they compete on price, costing roughly 50% as much as CDK on average. I am trying to verify this, so far I am basing that on discussions with Dealership owners use both and the CDK investor slides which states they get "~$1,000-$15,000" Per dealer per month in N. America (screenshot of slide attached), whereas Quorum charges ~$2,000.

 

[misterkrusty]

thanks Southpaw-

 

when you say Europe and Asia are different animals, I assume you mean US/Canadian dealerships for European and Asian car makers (e.g. VW, BMW, Toyota, Honda, etc.), right?  (i.e. not dealerships located in Europe and Asia)

[Southpaw]

Well...that was the CEO's quote, but I think he was referring to the process of getting OEM approval and certification and then integration. For example with Toyota, the system is different for Toyota US versus Toyota Canada. For European automakers, the interoperability between the various EU countries might not be uniform and thus one software platform won't work seamlessly across each of them if they are like Toyota US/Canada. So really it was auto dealerships in Europe, not necessarily European OEM dealerships in Canada...although I do also believe that Mercedes (or all Daimler brands) has an exclusive relationship with one single DMS provider for all of Canada, though I cannot recall who that is. I think it was ONE-EIGHTY corp, which was subsequently bought by CDK (then a/k/a ADP).

 

http://www.thefreelibrary.com/ADP+Canada+and+Mercedes-Benz+Canada+Launch+Application+Server+for...-a057841766

 

In thinking about integration issues across the EU, that could be part of the "different beast" sentiment--it's a different currency, different credit bureaus, different CarFax equivalents, different third party financing partners to integrate with in each country, etc. I'm not positive on all of that though. The implication being though that CDK is more "distracted" needing to spread out R&D to all of the various countries they are in and then each different OEM within those countries.

 

[Southpaw]

Just came across this article highlighting CDK raising pricing for each third party vendor they integrate with. Some of the vendors/dealers sound frustrated and it could help push people to Quorum.

 

Also, some confirmation with this: "A typical midsize dealership pays more than $5,000 a month for DMS offered by CDK or Reynolds and Reynolds." So Quorum is likely 60% cheaper on average. As I mentioned previously they haven't raised pricing in 10+ years and we will try and push them to build in low single digit price escalators into new contracts or a quick 5% price hike across the board. I don't think customers would balk at this. Not even a 10% price hike in 10+ years is crazy to me as cost of labor, etc. has risen.

 

This article also highlights the nightly "batching" as I mentioned, compared to QIS more real-time. "CDK, Reynolds and other, smaller DMS providers act as gatekeepers of dealer data in a couple of fundamental ways. One is to provide portals to outside vendors, protected by passcodes, to exchange data in real time with the DMS.

 

The other way is for approved contractors to extract the data in a batch, usually overnight, before organizing the information and parceling out the specific data fields that each vendor or carmaker needs in a timely way."

 

http://www.autonews.com/article/20150720/RETAIL07/307209962/dealers-will-pay-up-for-vendors-data-access-after-cdk-switch

[portfolio14]

What about the ongoing migration to cloud?

[Southpaw]

This is something to watch as we believe ultimately all software will move to the cloud, but as of now we are told the customers simply do not want it.  As we understand it, the industry is not "ready" to move to the cloud.  If their DMS system goes down, the shop literally shuts down, and this is an obvious primary concern for moving from onsite to the cloud.  There are some cloud solutions...Automate (http://www.automate.com) advertises a cloud solution, but we don't believe cloud DMS is going to become a major theme for the next couple years at least.

[Southpaw]

Quick update on QIS latest quarter. They reported a very solid second quarter.

 

YTD, new dealership installation revenue is up 50% y/y.  Management has recently increased implementation capacity in anticipation of a record year in 2016.  This puts them in line to install at least 36 in 2016.  At this point, we think they will finish 2016 somewhere between 340 and 350 dealerships.   

 

Cash flow was a bit higher than I expected, aided by:

 

1) Slightly higher than forecast Support/Support Plus revenue

2) Materially higher Transition revenue

3) Materially lower than expected G&A, which we understand is a good go forward run rate as they are now paying a lower lease rate on their offices (in a ratty shopping center).

 

Reported FCF was $134k, but in the quarter they paid off about $230k of Microsoft license payments that were supposed to have been paid off in 2014 (see our report for greater detail).  The upshot is that their run rate numbers have improved materially this quarter, and we believe it's something they can sustain and build on.

 

EBITDA: $2.4 million run rate (6.25x Ev/EBITDA at current price $0.40)

Adjusted Cash flow from Ops:  $2.8 million run rate

Adjusted FCF: $1.4 million run rate (10.7x EV/FCF)

 

With an EV of now about $15 million CAD at $.40, we believe this still way too cheap for an asset light company about to show accelerating revenue growth and material growth in cash flows. 

[KJP]

Southpaw,

 

Thanks for all the information you've provided on this company.  Two questions:

 

1) It seems a few recent posts have been deleted.  Have you changed your views about the implications of the recent capital raise and board changes?

 

2) Does the company report Communicator revenue on the Support line or the Support Plus line?  Also, do you have a public source for the $.06/message for Communicator revenue?

[Southpaw]

Thanks for your questions. I deleted the post as someone at the company was sensitive to some of the data I was highlighting. They didn't want competitors to see some data points mentioned, so I deleted them. My views have not changed whatsoever and I am more confident in the accelerating growth outlook now than I was a few weeks ago. FWIW, I bought more shares today.

 

The 6 cents per message we tried to back into in detailed discussions with management. This goes into the Support Plus line. Communicator volume should be up nicely sequentially and is very high margin revenue so will be a significant EBIT contributor in 2016. 

[SnarkyPuppy]

Appreciate you posting this - definitely seems like a great growth opportunity if management is able to execute as expected.  The OTC ticker seems to be trading at a slight discount due to liquidity.

 

With the current share price of 0.46 (TSX ticker) and new shares outstanding after December Issuance (50,422,471) total, it's market cap is now $23,194,336 CAD.  Net cash as of Q315 is $1,788,857 CAD and so Enterprise Value is $21,405,479 CAD.  Roughly ~22x uFCF for your 2015E projection and 11X for your 2016E projection.  Still seems cheap assuming all of these growth assumptions work out. 

 

I have some random questions as I dig through (if you don't mind):

 

1.  Any ideas on why Dealertrack left the Canadian market?  Should this be seen as a red flag or simply a shift in strategy unrelated to QIS?

 

2.  Has management indicated any plan on raising monthly support fees?  Seems like there is opportunity to increase here given competition prices and customer stickiness?  My guess is they are waiting to execute on rooftop growth before they raise. 

 

3.  I see you have modeled $0 in cash tax forever going forward.  I see that they have about 19mm in tax pools on PDF page 42 of the annual report which is a bit over my head in how those will materialize, but $0 cash payment in perpetuity seems quite aggressive?

 

4.  I'm having trouble replicating your numbers in your DCF - using "Base Case" as a proxy:

a.  I get a sum of 2015-2019 discounted cash flows of $7.9mm versus your $8.5mm.  What is your formula to arrive at each yearly dcf?  Are you pro-rating? 

b.  I'm struggling to get to your $24,389,462 Terminal Value - can you please add some color as to how you arrive at this?  I'm simply taking the present value of  (3,383,462 / (12% - 3%)) + backing out the 2015-2019 DCF's and I'm not getting anywhere close to your number.

 

 

[Southpaw]

Thanks for your questions and for taking a look.

 

You have to add the cash raised from the equity sale.

 

I have the following for pro-forma EV:

 

Quorum Pro-forma After Tricor:

 

Current Shares         41,818,297

Current Price $0.40

Plus Tricor Offering

Shares sold at $0.35

New Shares 8,872,909

Assumed Transaction costs $40,000

Net Cash Raised via Equity Offering $3,065,518

 

Current Cash on Balance Sheet $2,022,322

New Total Cash on Balance Sheet $5,087,840

Total Debt on Balance Sheet ~$230,600

Net Cash After Offering: $4,857,840

 

Shares Outstanding After Offering         50,691,206

Market Price (assuming stock goes back) $0.45

Market Cap $22,811,043

Net Cash $4,857,840

Enterprise Value $17,953,203

 

See bolded parts below for answers to your questions.

--

Appreciate you posting this - definitely seems like a great growth opportunity if management is able to execute as expected.  The OTC ticker seems to be trading at a slight discount due to liquidity.

 

With the current share price of 0.46 (TSX ticker) and new shares outstanding after December Issuance (50,422,471) total, it's market cap is now $23,194,336 CAD.  Net cash as of Q315 is $1,788,857 CAD and so Enterprise Value is $21,405,479 CAD.  Roughly ~22x uFCF for your 2015E projection and 11X for your 2016E projection.  Still seems cheap assuming all of these growth assumptions work out. 

 

I have some random questions as I dig through (if you don't mind):

 

1.  Any ideas on why Dealertrack left the Canadian market?  Should this be seen as a red flag or simply a shift in strategy unrelated to QIS?

 

We were told it was very small for them but it was having a disproportionate impact on their reputation.  E.g. their implementations were going very poorly in Canada and there is some additional cost/workflows staying in the Canada market that ultimately they decided it wasn't worth staying the market.  This does bring up the question of whether QIS might have the same issues...it's certainly possible, but my understanding is these are fairly small shops, on average, and that QIS is much more worried about implementatoin risk on the bigger (Tricor) projects.

 

 

 

2.  Has management indicated any plan on raising monthly support fees?  Seems like there is opportunity to increase here given competition prices and customer stickiness?  My guess is they are waiting to execute on rooftop growth before they raise. 

 

We have asked several times about this.  I think now is the wrong time although certainly eventually.  Right now they are stealing market share by having the reputation as being the lower cost but equal functionality solution to the larger players.  They have tremendous customer loyalty from their largest customers...it seems short sighted to threaten these relationships (which might actually stunt growth of new dealership) while they are ramping up into new OEMs.  Eventually some price raising will be appropriate, as some of their dealers have paid the same price for like 10 years running. I do think they should raise prices on new customers or build in price escalators into contracts. There is a ton of latent pricing growth, however, for the next several years that will be immensely accretive to the bottom-line.

 

 

3.  I see you have modeled $0 in cash tax forever going forward.  I see that they have about 19mm in tax pools on PDF page 42 of the annual report which is a bit over my head in how those will materialize, but $0 cash payment in perpetuity seems quite aggressive?

 

 

As long as they keep spending on R&D their tax rate will be very low, as they get R&D tax credits for the spend.  The CFO was pretty confident they would not pay any material cash taxes over the next five years. 

You'll notice in my run off analysis (separate from DCF) I do assume a 25% tax rate, as that would assume a more normalized tax environment (less R&D, etc.).  Also, my terminal margins are the same as my year 5 margins, which I believe builds in some implicit allowance for tax dollars...e.g. if EBITDA margins after year 5 move closer to 40% there is a decent sized implicit tax paid. 

 

The other way to do it (which I have no problem with), is assume full tax payer in the model, then try to value all the NOLs and future R&D tax credits separately, but then I would also assume a higher terminal EBITDA margin.

 

4.  I'm having trouble replicating your numbers in your DCF - using "Base Case" as a proxy:

a.  I get a sum of 2015-2019 discounted cash flows of $7.9mm versus your $8.5mm.  What is your formula to arrive at each yearly dcf?  Are you pro-rating? 

 

$913+$1,621+$1,945+$2,002+$2,012= $8,493

 

b.  I'm struggling to get to your $24,389,462 Terminal Value - can you please add some color as to how you arrive at this?  I'm simply taking the present value of  (3,383,462 / (12% - 3%)) + backing out the 2015-2019 DCF's and I'm not getting anywhere close to your number.

 

Formula =  FCF in 2019* LTG = $3,383,462

 

Take that $3.383, and divide by (Discount Rate - Growth Rate).  Discount that value, divide by (1+K)^4.5

 

Hope this helps. Please let me know if you have other questions.

[Southpaw]

Quorum implements first Ford dealership. So they now can do Toyota and Ford, with Nissan and VW coming, too. Both the US and Canadian TAM will have just about doubled by the end of 2016. By our estimates they only need to add 4 dealerships for each OEM to breakeven on the necessary R&D/Cap-Ex, which is mostly behind them at this point. They could breakeven within a single quarter on these new OEM integrations. Also, they will receive government grant money for integrating these new OEMs, making the TAM expansion potentially "free." To summarize, between 2014 and the end of 2016 they will have spent at most $850k to double their TAM by adding Toyota, Ford, Nissan, and VW, and the payback period could be 1-2 quarters at most for each OEM integration expense. From there, each incremental dealer will add profitable revenue at 85-90% EBIT margins. The stock could still double from here without ever adding another dealer and be comfortably undervalued.

 

http://files.ctctcdn.com/0d84405e101/04571cc1-59f4-4c5b-aafe-99c054597054.pdf

[SnarkyPuppy]

I'm still watching this closely - I took a deep look at your analysis and did my own work roughly around the time I made my last post.

 

I came to the overall conclusion that there's high execution risk and that there's not enough margin of safety at current prices due to the fact that they have to execute pretty strongly on growth over the next 5 years to get a sizable discount to intrinsic value.  They very well could execute on the growth, but I have yet to do detailed work on managements history of executing against pre-defined goals.  Seems like management's skill is a key factor here. 

 

Additionally, the sensitivity of the DCF is incredibly sensitive to slight changes in the transition of profit margins between revenue segments.  While the shifting of transition revenue/growth revenue to recurring revenue should increase recurring revenue margins going forward, I did not have enough conviction to be able to calculate within a few % points how that transition will really look like.  Differences in a few percentage points within the year over year shifts materially impact the DCF formula and quickly erode any margin of safety. 

 

I guess my questions for you in general (and you don't owe me a response, only if you would like to expand) are:

- How high is your conviction in the incremental 85-90% EBIT margins impacting the existing recurring revenue figures?  I do not think I was able to arrive at detailed figures myself and was mostly guessing/assuming a lot.

- Have you performed any work to analyze managements ability to execute on growth? 

 

I do think it is generally undervalued, but I'd like to be compensated with a large margin of safety for growth execution risk and fx risk. 

[Southpaw]

Thanks, DC. Any DCF is sensitive to the inputs, so without seeing your DCF I can't give you a great answer as to what you are doing, but I would argue don't miss the forest for the trees.

 

We have met with management a few times and speak with them on a regular basis (once a month on average). They have done a tremendous job on execution and continue to deliver on most things they aim for. I often want the CEO to become more focused on investor relations (for obvious reasons), while he remains hyper-focused on execution and doesn't much care for IR.

 

My conviction in the incremental EBIT margins is high. 85-90% margins are based on management telling us this, along with our understanding how the support structure works.  There is a centralized support center...for every support employee they can add many, many dealerships, resulting in very high operating leverage for the existing customer base.  Typically once a DMS is up and live there is very little ongoing support or costs.  There is very little dealer customization (e.g. different versions of the software).  There is additional training, but they are able to charge a nice fee for this (see Support Plus revenue).

 

You can say that since we have invested in the company in 2014, management has hit every target they have told us they would hit, within a dealership or two (with upside on average revenue per dealer).  They have generally been relatively conservative with us.  We reviewed their long term history and noticed their hype levels were much higher back in the early 2000s...they seem to have learned from this over time and have been pretty solid in execution since.

 

They told us their biggest worry is execution risk and hence why they are targeting lower growth rates than what the opportunity set actually is (e.g. they are delaying implementing Tricor dealerships because they want to "get it right"). They have an embedded pipeline of growth with more new business than they can handle and enough rooftops just within the Tricor dealer group to keep them busy with accelerating growth in rooftops for years (e.g. +15%, then +20%, then +25%, then +30%). As stated before we think the shares are a 2x if they stop growing and just harvest the existing embedded cash flow. This logic is often why high recurring revenue software firms rarely trade below 2.0x sales. If you are hung up on getting a precise DCF, focus on transaction comps and trading comps and you will find the shares plenty undervalued using these various methods.

 

A final point can be they have grown the dealership base every year except a slight decline during "armageddon scenario" in 2009.  Starting in 2013-2014 you began to see the beginnings of them hitting scale.

 

 

[Southpaw]

DC, I'd also suggest reaching out to the CFO or CEO for a phone call if you want more clarity on incremental margins.

[Southpaw]

QIS seems to be on a PR tear right before the National Automobile Dealers Association convention, which comprises one of their largest marketing expenditures for the year. Nothing too earth shattering in this release, although I do believe the real-time integration from mobile is superior to competitive offerings. Despite Q1 ending today, QIS will not announce Q4 earnings until late April, but will have perfect insight into Q1 and even Q2 by then.

 

---

 

LAS VEGAS, NEVADA--(Marketwired - Mar 31, 2016) - Quorum Information Technologies Inc. (Quorum) (TSX VENTURE:QIS), a North American automotive dealership and customer management system provider, announced today that it is revealing the first of its new mobile applications for its flagship system, XSELLERATOR™ at the 2016 NADA convention in Las Vegas, Nevada, beginning April 1, 2016.

 

 

The Quorum DMS, XSELLERATOR, has always been able to run completely on a mobile platform (such as tablets) due to its inherent architecture. However, the system was presented in its entirety on the screen, which was not always ideal for smaller devices or screens with lots of information. Quorum, therefore, has embarked on a strategy to develop true mobile applications for key DMS functions that scale and run on popular mobile platforms such as Apple's iOS and Google's Android operating system.

 

Quorum is showing the first two of these applications on the exhibit floor of this year's NADA convention. The Vehicle Inspection Process app (VIP) lets service advisors and technicians take their device right to the customer's vehicle to do walk around inspections and sell additional services. While some companies provide similar functionality in their standalone drive-through systems, Quorum's system is unique in that it is fully integrated with XSELLERATOR in real-time and does not require that information be pulled from, or pushed to, the DMS like a third party system does.

 

The second application the company is showing is for Sales CRM. The popular "sales planner" - a comprehensive showroom and customer follow-up part of XSELLERATOR - has been developed for mobile devices so that salespeople are not tied to their desks while they work with showroom prospects and complete their daily follow-up. It, too, is fully integrated with XSELLERATOR in real-time.

 

Dan Ichelson, Quorum's Vice President of Product and Operations, stated "This is an exciting development in the evolution of XSELLERATOR. For the past couple of years we have been adding new functionality in XSELLERATOR using modern scalable technologies such as HTML5. The technology allows us to develop clean, intuitive screens for dealership personnel and scales well to different sized devices. Now, we are taking that strategy a step further and isolating key features of the system that users can benefit from using while not at their desks. We are putting it in their hands, wherever they are, in the form of true mobile applications that communicate directly with the XSELLERATOR DMS."

 

"This is just the tip of the iceberg," Ichelson added, "We plan to release several other mobile applications in the near future, including a fully mobile version of our highly successful Communicator - Quorum's integrated two-way texting and emailing tool. These new applications are the examples of our overall product direction and strategy."

 

Mark Allen, Quorum's Vice President of Sales, Marketing and Services, remarked, "We invite all dealerships who are attending this year's conference to stop by our booth [#2859C] and see these applications, as well as the rest of our leading edge DMS, for themselves."

[Southpaw]

I was going back through Quorum's old MD&A's to see how ARPU held up during the Great Recession. ARPU was quite resilient and rose year over year in 2009. I think that even if car sales in the US and Canada fall off a cliff (where they have been confounding the bears for a while with continuing strength) QIS will continue to both grow ARPU and dealer rooftop count.

 

Also, this is from some of our old notes:

 

Typical transaction for a dealership is $40k upfront, $22-25k per year.

If a dealership is at $22k per year, roughly $15k (68%) would be fixed and $7k (32%) would be based on dealership subscribers.

Subscribers amount does not vary materially – it’s usually about $50 per user so it is more likely that if a dealership reduces headcount, they don’t bother contacting QIS to reduce the subscription because the cost is so small.

 

Once again, 2009 provides a great stress test here. Despite dealerships undoubtedly firing employees over this time and lowering net employee counts, QIS was actually able to increase ARPU. Going forward, we have even more reason for conviction in ARPU inflecting higher once again. Attached you can see historical ARPU charted out, along with dealer rooftop count and y/y rooftop growth. ARPU has stalled out since 2009, but I expect it to inflect higher this year as the ARPU for each new larger Tricor dealership added will be $3,000+/month or $36k+/year compared to the company's current $26k. So as the growth from new installations shifts to these larger dealerships ARPU will start to rise again. Neither the number of units sold industry wide nor the level of employment will be material drivers to growing the recurring revenue base. Most important is that the dealership simply stays open and keeps the lights on. Also, increased employee turnover would potentially benefit Support Plus revenue as new employees would always need training.  I will post another update after Quorum reports Q4 earnings and I have another call with management at the end of April.

QIS_ARPU_and_Dealer_Count_Chart.pdf

[Southpaw]

In my first post on QIS I highlighted how the total addressable market (TAM) has grown substantially but didn't not provide very much detail. I wanted to go over how the TAM has grown in more detail and made a table here breaking the company's TAM down by manufacturer and by US/Canada. The total TAM will have exactly doubled by the end of 2016/early 2017 (from 2014) as the company has gone from only serving GM/Chrysler and Hyundai, to adding Toyota and Ford capability along with VW and Nissan forthcoming. Almost all of the investment for these growth initiatives are behind them (outside of hiring implementation personnel). We've spoken with several of their dealers who are satisfied customers that own multiple auto OEM dealership brands will now be switching their existing Ford and Toyota dealerships to Quorum from CDK and Reynolds & Reynolds. See attachment for a detailed breakdown.

QIS_TAM_Table.pdf

[Southpaw]

See attachment for more detailed thoughts on incremental EBIT and value contribution from the next 60 dealerships added. I show why I think that the value creation from adding just the next 60 dealers could be worth >100% the current EV ($14.93mm) at a FCF multiple of only 8x. The growth and addition of these 60 dealers is baked in the cake at this point.

QIS_-_Incremental_EBIT_and_valuation_from_adding_the_next_60_dealerships.pdf

[KJP]

See attachment for more detailed thoughts on incremental EBIT and value contribution from the next 60 dealerships added. I show why I think that the value creation from adding just the next 60 dealers could be worth >100% the current EV ($14.93mm) at a FCF multiple of only 8x. The growth and addition of these 60 dealers is baked in the cake at this point.

 

Southpaw,

 

First off, thanks for your diligence in following up on this and continuing to share your thoughts.  Regarding your incremental EBIT numbers, can you provide a bit more color on why you think incremental EBIT margins will be as high as you expect?  Is it that Quorum has already hired the support personnel, etc. needed to service the new dealerships?

[Southpaw]

Thanks for the question. 85-90% incremental EBIT margins are based on management telling me this explicitly, along with my understanding of how the ongoing support structure works.  There is a centralized support call center with most of the costs fixed. So for every support employee Quorum can add many, many dealerships, resulting in very high operating leverage as the existing customer base grows.  Once the software is installed and is up and running there is very little ongoing support or costs.  There is also very little dealer customization (e.g. different versions of the software) so the installation can happen quickly. In addition to your point, they have hired implementation personnel in advance of increasing rooftop growth, but I don't we have seen the full effect of those added expenses yet, but will see some of it in the Q4 report (end of April) and Q1. So these high incremental margins may not show immediately, but this is my assumption of the true underlying run-rate of FCF after a few quarters pass (say, end of 2017) and the additional salaries of implementation personnel have hit and are "amortized" over a large base of dealerships. They are getting no credit right now for any of this highly profitable growth, which I think is baked in the cake at this point thanks for the Tricor board addition. This is mostly just because no one knows about it and knows its coming...or, rather, believes that its coming. 

[Southpaw]

I came across this random and recent YouTube video of QIS' CEO, Maury Marks. The video was made to highlight Quorum's inclusion in the TSX Venture 50 awards.  When introducing Quorum Marks states that they have 320 dealerships across the US and Canada. The video is dated February 23rd, 2016.

 

 

Our estimates for a 2015 year end number were around 302-303. It is unclear if by 320 Marks is including dealerships in which a contract has been signed but not yet implemented/installed. Even if Quorum were to hit the 320 by only the end of Q1 or even by the end of Q2 of 2016 they would be way ahead of schedule in terms of our base case assumptions for rooftop growth. In a previous post I highlighted the incremental FCF that could come from adding 60 dealerships, but that was assumed to come over the next two years, whereas it sounds as though they may have added up to 17 just in the first seven weeks of 2016 and be on pace for adding 70+ just this year alone. Additionally, we are confident that the cadence of new installations will be accelerating over the coming quarters, so the pace could pick up from here. The implications from this level of rooftop growth for recurring revenue growth and cash flow growth are huge and still pretty much no one thinks its coming.