QIS.v - Quorum Information Technologies

[Libs]

Southpaw,

 

Thanks for all your work on this. Are you concerned about share count going from 39MM to 50MM in just two years, including issuance at .35? Shouldn't they be able to self-fund their growth at this point?

 

[Southpaw]

Thanks for the question.  I do not like the share count increase, but I am also not too concerned. Of course, if you were not an existing investor before the share sale it is a sunk cost at this point and won't effect you. The most recent share issuance was all about selling a large piece of the company to Tricor Automotive Group to create a partnership with them and give them significant financial incentive to transition all of their dealers over to Quorum. They can self fund and have been and I would not anticipate any more fund raising. If anything, I'd expect a return of capital within the next year, probably initiating a hefty dividend with a  payout ratio targeted as a percent of free cash flow and 4-5 years from now I think the share count will be much lower not higher.

 

If this were private or I owned it outright, I'd actually want them to put the pedal to the metal on rooftop growth for a few years and run the business at  cash flow neutral as the lifetime value of adding new dealers is so high and they could stop growth and milk cash flow anytime they wanted to (as Reynolds & Reynolds is doing with >50% EBIT margins).

[Southpaw]

Quorum finally reported Q4/Full year 2015 results. There were not too many surprises. Increased third party costs were the biggest surprise/disappointment. A quick update is below.

 

Integration revenue distorts what we view as the the pure underlying revenue growth. 

 

Here are three ways to look at the revenue growth.  While our base case on revenue growth now looks a little bit conservative for 2016, it's very likely that this year's growth rate is above last year's although it will be hard to top Support Plus' triple-digit growth in 2015.

 

                                                                                        2013 2014 2015

Total Y/Y                                                                       5.6% 15.4% 16.6%

Total Recurring Revenue Y/Y                                         6.6% 4.4% 19.0%

Total Core (Recurring+Implementation) Revenues Y/Y 2.6% 8.3% 21.5%

 

Some additional notes not found in the filings:

 

1) They ended at 303 rooftops at the end of year and are around 330 currently if including those in the implementation phase (See previous comments on CEO's YouTube video citing 320 two months ago).  They are on track to meet or beat or the 335 2016 end of year number we have.  This is a clear positive. The CEO still says they have capacity issues, thus they will likely be investing in even more service and implementation oriented employees in the summer to get themselves capacity to do >4 large dealerships per month (have hired 6-7 so far since start of Q4).  CEO believes the demand is there.

 

2) National Automobile Dealers Association (NADA) Annual Convention feedback: Someone actually bought the software right there on the floor of the convention after a short demo. They have never seen that.  Traffic was ~10% higher this year, but CEO estimates that each person represented 2-3 more rooftops...so this year they had potentially double the "rooftop exposure."

 

3) 52% gross margins, 15% EBITDA margin seems "about right" for this year, roughly in line with 2015.  FCF will be disappointing relative to our previous expectations due to continued hiring, although most all of the capex at this point has to be placed firmly as "growth capex." Cash flow from ops should grow.

 

4) Gross margin issue.  Once again Q4 they lumped in a bunch of disappointing financial "clean-up" items.  Apparently there was some extra Oxlo charges, 1-2 cases of discounting new servers to get customers to upgrade.  The depressed gross margin doesn't change the underlying dynamic of high margin recurring revenue, but lowering implementation cost recouped will suppress margins in the short term and lengthen payback period slightly.  Another main cause of increase in third party costs during was the parabolic spike of the USD/CAD exchange rate in December.  This will probably get better in 2016 given how the CAD/USD has moved recently and we view this as a transitory issue.

 

5) Customers using CRM: this is a new metric they are reporting.  There is some incremental training revenue potential from this, but otherwise it's part of the integrated system package for customers paying for XSELLERATOR. It is a good selling point for them to have a fully integrated DMS/CRM package.

 

6) Pricing: they weren't able to firmly say ARPU is definitely rising.  That is disappointing, but all their qualitative speak about newly signed dealerships being much larger suggests it is in fact rising.  They said renewal pricing is holding firm (not going up, but at least not going down).  They have started to turn away dealerships with less than 10 employees and are shifting their focus towards larger customers, which is a positive.

 

7)  Communicator:  While I don't have the exact numbers, messages sent is still growing very quickly and this is high margin incremental revenue.

 

8 ) About 2/3 of new installs YTD have been to non-GM dealers.  This is in stark contrast from several years ago and lowers their OEM concentration risk, although GM/Chrysler still a very high %. There has been at least 5 new Toyota dealerships turned on YTD, so this part of the thesis is playing out so far.

 

9) They may be getting additional cash from government.  $1.1 million in the form of an interest free loan and then potentially $272k in "free money", e.g. a grant, that they are waiting to here back on and will know by Q1 report date.

 

10) Q1 results will be reported in the last week of May after the next board meeting.

 

11) We suggested the start doing investor conference calls, so that they don't have to talk to us as much and they seem open to initiating them.

 

12) They are still at least pretending to be considering hiring an outsourced IR firm at some point, though it was obvious it hadn't really been talked about much internally and is not a priority. I will continue to encourage them do so.

 

13) Sounds like Support Plus revenue could approach $2 million this year, well above our current base case forecast.  Even though they will allocate some resources away from it to make sure Tricor dealerships are going well, they can still grow this substantially and in terms of training backlog they are completely booked through July.  Very good news.

 

14) Overall, we are more confident on the revenue growth side of things versus the cost management side.  "Growth is more important than margins over the next two years."- CEO

We somewhat agree with this sentiment, as pointed out in my last post, I am for throttling growth here at the cost of near term cash flow.

 

15) Nickel & diming by Quorum's competitors is still the most common complaint from customers who switch over to Quorum who are seeking a comprehensive solution at one low price.

 

The stock is still cheap with an EV at about 1.7x our 2016 recurring revenue estimates with positive cash flow and recurring revenue growth accelerating from here at 20%+. Almost every other nano-cap Canadian or US software stock gets higher multiples despite negative cash flow and similar or lower revenue growth. We are putting together a more comprehensive trading and transaction comps analysis to further highlight the terrific value.

 

[Southpaw]

To Libs earlier question on share issuance and why I think a share buyback (and dividend) is more likely in the next 1-2 years than more share sales:

 

"During 2015, the stated capital of the Corporation was reduced by $11 million, without any payment or

distribution to the shareholders. The purpose of reducing the stated capital of the Common Shares is to

reduce the aggregate of the Corporation’s liabilities and stated capital so as to increase the difference

between such amount and the realizable value of our assets, thereby providing additional flexibility under

the Alberta Business Corporations Act (“ABCA”), should the Corporation decide to buy back or

otherwise acquire some of its own Common Shares pursuant to a normal course issuer bid. The reduction

in stated capital was approved by the shareholders during the Annual and Special Meeting of the

Shareholders on August 21, 2015."

[Southpaw]

Attached a few charts of key metrics updated to show the latest quarter.

Quorum_Q4_2015_Update.pdf

[Southpaw]

Elliot ratchets up CDK activism campaign...I believe CDK trades right around 5x EV/run-rate Recurring Revenue and Elliott and others seem to think they will get a nice premium to that in a buyout. QIS is growing 20%+ and at around 1.7x.

 

"CDK held talks with select private equity firms last year and was working with Morgan Stanley to explore the potential for a sale after receiving unsolicited interest, people familiar with the matter said in August. The company is attractive to PE buyers because of its strong recurring cash flows from auto-dealer subscriptions and the opportunity to reduce costs."

 

http://www.bloomberg.com/news/articles/2016-05-04/elliott-ratchets-up-cdk-campaign-to-boost-margins-buybacks

[Southpaw]

Here is a QIS Press release today. ~$300k in Communicator revenue for 2016 is ahead of our expectations.

----

Quorum Information Technologies Announces Dealer Results

XSELLERATOR DMS Customers Exceed $5 Million in monthly Service Revenue & 1 Million Communicator Messages

 

CALGARY, ALBERTA--(Marketwired - May 10, 2016) - Quorum Information Technologies (TSX VENTURE:QIS) (Quorum) released composite results today for its dealership customers that are using the ground-breaking Communicator integrated text and email tool, and Vehicle Inspection Process (VIP) toolkit available within Quorum's dealership and customer management system, XSELLERATOR. There are ten (10) Make More Money (M3) toolkits available in XSELLERATOR - specific sets of process, software functionality and training that are designed to maximize dealership revenue. Chief among them are the fully-integrated and inclusive Vehicle Inspection Process (VIP), which encompasses the entire service flow starting with the customer appointment, through advisor and technician inspections and quoting additional work required.

 

Communicator has continued to gain widespread adoption and high use among dealerships using Quorum's modern DMS. Over three million messages were processed by the system in 2015. However, by April 8th of 2016 Communicator had produced one million messages already - a 47% rate increase over the same period last year.

 

"It has been amazing to see how Dealerships have recognized the value that Communicator brings to their business, and the positive reaction to the tool from their customers. Over 200 dealerships using XSELLERATOR are actively taking advantage of Communicator today, with more starting every week. We expect to hit five million messages in 2016, and have some more exciting news about Communicator coming soon," commented Maury Marks, Quorum's President and CEO.

 

Quorum also released that, when aggregated, the dealerships that have been formally trained on the use of XSELLERATOR's powerful VIP functionality collectively sold $5,145,545 Million in additional customer pay service and parts revenue in March 2016. The 90 dealerships that are trained sold an average of $57,172 each in March 2016.

 

Marks said, "We are proud of our dealership customers that have made the most of their DMS investment to generate returns for themselves, and provide a valuable service for their customers. Helping our dealership customers achieve their business and financial goals is the cornerstone of what Quorum is all about. Launched just a couple of years ago, the M3 and VIP processes have really taken off and we continue to train dealership on how to fully exploit the capability of XSELLERATOR to their benefit every month. I wouldn't be surprised if we are announcing numbers twice this high this time next year. Especially given our recent announcement about the mobile applications that allow inspections to be conducted from a mobile device and tie right into XSELLERATOR."

[Libs]

Southpaw

 

Thanks for the updates / analysis. I'm slowly scaling in, and enjoying how this is playing out.

[Southpaw]

Came across another software buyout.

 

Vista Equity, a PE shop focused only on software names that is active in the auto DMS space through one of their portfolio companies DealerSocket, is buying CVT.

 

Cvent is growing sales at about 20-25% with EBITDA margins in the low teens.

 

Obviously the scale and the business are different from QIS, however, revenue growth appears to be decelerating and the buyout price still looks to be around 6x 2016 sales and 7x recurring revenue, and almost 50x Adjusted EBITDA (I think they are almost EBITDA breakeven ex-adjustments).  Looks like they are cash flow positive, mostly because of deferred revenues from working capital mix.

 

Software buyouts continue to occur at 7x+ recurring revenue. If we look at Solera/Textura/CVENT, and then look at potential CDK LBO, we can get a decent picture of what QIS might able to fetch. It is still at ~1.6x 2016 recurring revenue.

[Southpaw]

There was another software buyout announced today. SAAS for NICE at a 55% premium and 5.7x EV/"adjusted" subscription revenue. Revenue growth was -7% in 2015 (but there was a mid-year divestiture, not sure of organic sales growth rate). QIS is at 1.6x EV/forward recurring revenue. At 4x it still has 100% upside from here. QIS is growing recurring revenue at 19% and has EBITDA margins of 17.6% versus NICE at 23.6%. They will report Q1 in ~1 week.

 

From Jefferies:

 

Key Takeaway

 

SAAS announced it is to be acquired by NICE Systems (NICE, NC) for $14 per share (55% premium to previous close). NICE management believes the deal makes strategic sense as it creates a seamless "Experience Center" across contact center and WFO, while leveraging its analytics capabilities. The deal price announced implies 5.7x EV/adj Sub Rev, relative to our estimate of the value of the subscription stream alone (no growth) at 4.5x.

 

Deal Terms. inContact entered into a definitive agreement to be acquired by NICE Systems (NICE, not covered) for $14 per share, which represents a 55% premium to the closing price on May 17. The transaction values inContact at about $940 million, including repayment of its outstanding convertible debt and excluding cash on hand. NICE plans to finance the acquisition with cash on hand as well as debt of up to $475 million. The deal is expected to close by the end of 2016, and is subject to regulatory approvals and shareholder approval. NICE expects the acquisition to be accretive to non-GAAP earnings in 2017. When asked on the conference call if there was a breakup fee, it was noted that there is one and it is "fairly standard for these kinds of deals."

 

 

Product Synergies. NICE management spoke of strong product synergies between inContact's contact center software and NICE's WFO (workforce optimization) capabilities, as well as potential innovation through layering on analytics. On the conference call, NICE management noted their aspiration to develop a seamless "Experience Center" using this approach. We note that inContact has an in-house WFO solution, which was developed from the May 2014 acquisition of Uptivity, and enhanced by the Jan 2016 acquisition of AC2. Additionally, inContact has partnered with Verint to offer an enterprise-class WFO solution to larger customers. When asked on the conference call about the go-forward prospects of the Verint relationship, inContact's CEO, Paul Jarman, simply said the company would do what is best for the customer.

 

 

Valuation. At $14 per share, we estimate the acquisition price represents 5.7x EV/TTM Adjusted Subscription Revenue. We estimate the value of the existing subscription stream alone (no growth) to be 4.5x. inContact grew Software revenue 43% in FY15, and has been recognized as a leader in the cloud-based contact center space, including a position as "Leader" in Gartner's Magic Quadrant: Contact Center as a Service, North America, as of October 2015.

 

[Guest Schwab711]

Do you believe management would be open to a sale?

[Southpaw]

Yes.

[Southpaw]

Schwab--For example, I believe they had talks with Constellation ~2 years ago.

[Southpaw]

FWIW, volume is really picking up here (on a relative basis, at least, absolute dollar amount is pretty low still). There is 150k traded on the day with another 80k shares offered out loud and more behind it.

[Southpaw]

Volume is still picking up with 138k shares offered out loud at $0.49.

 

Working more on Transaction Comps here...

 

Here is a list of acquisitions made by Vista's Dealer Socket:

http://www.vistaequitypartners.com/company/dealersocket

http://dealersocket.com/

 

On slide 15 here, there is a pure transaction comp: Cox Automotive bought XTime at 8.1x LTM Revenue in November 2014. Half this multiple would make QIS a homerun. 

http://www.capstonellc.com/sites/default/files/Capstone_SaaS%20%26%20Cloud%20Report%20Q3%202015.pdf

 

Overall the Capstone presentation linked to above shows median software M&A getting done around 3x, but has the Vertical Market public trading comps trading at a median of 5.9x LTM Sales and 17.7x EBITDA (slide 25).

 

Here is Dealer Track buying Incadea at 3.4x LTM Sales and 22x EBITDA:

http://www.gaccny.com/en/news/news/artikel/dealertrack-expands-beyond-us-with-acquisition-of-german-software-provider-1/?cHash=9932e3d4a2fba732643eec030ab6a1c3

 

CDK bought One-Eighty Corp:

http://www.cdkglobal.ca/solutions/front-end/dealership-sales/one-eighty

 

Some other comps in a table are attached. They include another pure-play/ideal comp in the Dealer Track buyout at 4.6x LTM sales.

 

 

 

[Southpaw]

QIS is out with Q1 results. Revenue up 21% y/y and EBITDA +36%. I will post a better update and detailed breakdown soon.

 

Here is the press release:

 

http://files.ctctcdn.com/0d84405e101/650fdd73-954f-4cec-9552-904d172f7c26.pdf

[Southpaw]

See attachments for updated charts.

 

1) Core Revenue growth accelerated to 22%...Core Revenue is something we track and is everything except transitions revenue which are lumpy and transactional in nature.

2) The most impressive area of growth was in Net New Installs.  $400,000 implies at least 10 rooftops were added in the quarter.  Net new install revenue nearly doubled.  This bodes well for future Support revenue growth and we think the New New Installs growth will only accelerate from here (this is what the hiring was done in anticipation of).

3) Support and Support Plus growth was still solid at around 15%, but we expect it to accelerate in the coming quarters.

 

Volume continues to pick up. Shares are fairly liquid in this range with several 100k+ share volume days in a row now and it looks like a few hundred thousands shares for sale that keep showing up at $0.48-$0.49.

[Southpaw]

There is another large software buyout this morning. CRM is buying DWRE at 10.6x recurring revenue. That recurring revenue stream is expected to grow 31% in 2016 over 2015 and 28% in 2017. This is only slightly above QIS' recurring revenue growth rate in the last quarter. EBITDA margins for DWRE have been and are forecasts to continue to be under 10%.

 

Here are some good presentations from boutique investment banks packed with data on software industry valuations:

 

http://www.shea-co.com/assets/Shea__Company_Quarterly_Software_Market_Review_1Q_2016.pdf

 

https://www.dropbox.com/s/p1xspq6my9gz5tp/Software_Industry_Financial_Report_1Q16.pdf?dl=0

[Southpaw]

One more software buyout today. Vista Equity buying MKTO.

 

6.1x 2016 recurring revenue while MKTO EBITDA is at breakeven. MKTO expected to grow recurring revenue at about a 26% clip next year.

 

Quorum is valued at 1.7x recurring revenue, growing recurring revenue almost just as fast at 22% last quarter (and inflecting higher), but has positive 17.3% EBITDA margins.

 

I cannot find another software company with a similar growth and profitability profile below 4x recurring revenue...other than QHR.

[Southpaw]

Attached is a table summarizing all of the recent software buyouts I've mentioned in the last six weeks. There has been at least 8 announced software buyouts since April 18th.

 

On average deals are getting done in the 7.5x recurring revenue range. These buyouts have had about the exact same revenue growth as QIS, but much lower EBITDA margins and much lower % of total revenue as recurring subscription revenue (lower quality revenue overall). 6x 2016 recurring revenue would give QIS 170% upside from here (this would equate to 4.92x 2016 sales).

 

 

 

 

[Southpaw]

Just got more info on QLIK with the buyout finalized today. The EV/Recurring multiple would skew the median and average much higher.

 

To continue to hammer home ridiculously cheap QIS and QHR are, check this quote on QLIK buyout: "The deal price announced implies 10.3x EV/LTM maintenance; a fair multiple for a financial acquirer to pay, although we believed it reasonable for a strategic purchaser to pay more...12x EV/Maintenance represents a stock price of $35, which also would not have surprised us." And this is with only 18% revenue growth for QLIK.

 

Some comments from Jefferies:

 

Key Takeaway

 

 

QLIK announced it has agreed to be acquired by Thoma Bravo for $30.50 per share (5% premium to last night's close, 73% premium to the recent low on Feb 12 and 43% premium to the avg closing price over the 30 days prior to Elliot Management's announced position). The deal price announced implies 10.3x EV/LTM maintenance; a fair multiple for a financial acquirer to pay, although we believed it reasonable for a strategic purchaser to pay more.

 

 

 

Deal Terms. QLIK’s board unanimously approved to be acquired by Thoma Bravo for $30.50 in cash per share. The deal which is expected to close in the third quarter of 2016 is still subject to regulatory and shareholder approval.

 

 

Expected a wider array of suitors. There has been speculation for a while now that QLIK was potentially up for sale. While it was always reported that rumored interest was from private equity firms, we had expected QLIK to have received broader based appeal among strategic acquirers. However, given the increasing presence of private equity transactions in the Software space, this is not surprising.

 

 

Valuation Reasonable. Based on Chart 1 on the next page, we view the $30.50 offer as reasonable, as it represents a 10.3x EV/LTM maintenance multiple - just below the 10.8x mean of the precedent transactions we considered, which were growing at a slightly higher rate.

 

 

Others? Some Room, But Not Much. We thought we might see broader appeal of this asset, which we believe: (1) represents a unique, modern analytics platform of meaningful strategic value, (2) with ample opportunities to improve efficiencies in Sales & Marketing (especially in how it handles the channel), and (3) the ability to exceed revenue expectations for the rest of this year and potentially beyond. 12x EV/Maintenance represents a stock price of $35, which also would not have surprised us. We would assume there's a breakup fee to this transaction, but it's unclear at this time, and how large a hurdle that would be for another potential acquirer to enter the fray.

 

 

 

[Libs]

Southpaw ( or anyone):

 

I'm trying to imagine this company after its growth phase is over, and how much cash an owner would be able to take out of it once it's just a cash cow ( like CDK).

 

Couple of things I'm wondering about:

 

1) They generated 409K in operating cash this quarter. They also spent 378K on software development, up 22%, in line with revenue ( so still 13% of revenue).That doesn't really leave any FCF. From reading their report, it seems these costs will continue at this level for quite some time.

 

How would a potential buyer look at this issue? At what point will these software costs scale?

 

2)  "3rd party costs" were up 60% Y/Y. 

 

"Many of the licenses required for transitions and new installations are purchased in US dollars and this has had a substantial impact on third party costs. "

 

This sounds to me like an expense that will drop off once the business has matured and installations taper, right?

 

I realize these companies sell at multiples of revenue and EBITDA, but I'd like to get a sense of the real cash generation potential down the road ( maybe the current multiples being paid are inflated?).

 

Sorry if these questions have been answered, I'm far from an expert on software co.'s.

 

 

 

 

 

[Southpaw]

Libs--A large percentage of those cost are one-time integration costs. This should trail down over time as OEM integrations are completed. They also get grants from the government to cover some of these cost.  Steady state software development cost we estimate at $750k/year.

 

Look back through some of my older posts about incremental EBIT margins and it gives some sense of margins if they stopped trying to grow. We think they could do 40%+ FCF margins. Remember we've heard that Reynolds & Reynolds has 52% EBITDA margins...QIS will have no interest, no taxes, and minimal cap-ex, so their FCF margin could be almost that high. So if they grew revenue 20% two years in a row then stop growing you'd be paying 2-3x EV/FCF, potentially.

 

Total fixed third party costs are running at about $700k annually and shouldn't move much from there.  All the other 3rd party costs are associated either with implementations, transitions (both are recouped with a small profit) or are one time OEM license fees (like they have to pay Ford a one time $25k fee).

[Southpaw]

Came across another near perfect transaction comp from 2007.

 

Dealertrack bought Arkona, announced April 26th, 2007. Arkona's trailing revenue was about $12.1mm, growing at about 35%. Recurring revenue was ~51% of total revenue, ~$6.2mm. The transaction value was $58.9mm, so Arkona was bought out at 9.45x trailing recurring revenue. This company was the exact same size as Quorum with much lower % of revenue recurring. They were growing slightly faster, at mid-30s (recurring revenue not growing as quickly as total, the opposite of QIS), but with rapid deceleration in the last few quarters before being bought. Arkona's EBITDA margins were about 5-6% lower than QIS' current at 12.5% versus QIS 17.3%. Overall this is about as perfect of transaction comp as we've come across in terms of size, growth, and profitability and it was done at 9.45x recurring revenue and about 4.8x LTM revenue. If QIS garnered just half the LTM recurring revenue multiple the stock would have 90%+ upside.

[sae85400]

Any reason for the 16% drop this morning.?