Author Topic: QIS.v - Quorum Information Technologies  (Read 34290 times)

KJP

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Re: QIS.v - Quorum Information Technologies
« Reply #10 on: December 17, 2015, 02:51:30 PM »
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

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Re: QIS.v - Quorum Information Technologies
« Reply #11 on: December 17, 2015, 03:08:30 PM »
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

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Re: QIS.v - Quorum Information Technologies
« Reply #12 on: January 03, 2016, 06:12:35 PM »
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

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Re: QIS.v - Quorum Information Technologies
« Reply #13 on: January 04, 2016, 12:19:24 PM »
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.[/b]
 


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

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Re: QIS.v - Quorum Information Technologies
« Reply #14 on: February 04, 2016, 08:14:09 AM »
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

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Re: QIS.v - Quorum Information Technologies
« Reply #15 on: February 04, 2016, 09:58:38 AM »
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

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Re: QIS.v - Quorum Information Technologies
« Reply #16 on: February 04, 2016, 10:30:21 AM »
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

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Re: QIS.v - Quorum Information Technologies
« Reply #17 on: February 04, 2016, 10:31:52 AM »
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

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Re: QIS.v - Quorum Information Technologies
« Reply #18 on: March 31, 2016, 09:30:29 AM »
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.

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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, XSELLERATORô 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

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Re: QIS.v - Quorum Information Technologies
« Reply #19 on: April 12, 2016, 03:04:14 PM »
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 Ė itís usually about $50 per user so it is more likely that if a dealership reduces headcount, they donít 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.