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Quorum Information Technologies Inc.

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Presentation on theme: "Quorum Information Technologies Inc."— Presentation transcript:

1 Quorum Information Technologies Inc.
Security Analysis April 25, 2016 Analysts: Alex Vegh Muneeb Ahmed

2 Recommendation: BUY - $0.58 Target (39% Margin of Safety)
Executive Summary Recommendation: BUY - $0.58 Target (39% Margin of Safety) Acquisition-heavy industry: Trading well below comparable company and precedent transaction multiples Insider customers: Dealership group recently purchased large stake in company and joined the board Gloves are off: Competitor leaving Canadian market will grow total rooftops by at least 10-15% by 2017 Key Statistics Share Price ( ) $0.42 Market Cap $21,544,444 Beta (5 year vs. TSXV) 0.22 S/O 51,296,294 52 Week Range $0.25-$0.49 Revenue CAGR (5 year) 6.8% EV/EBITDA 9.76x EV/Recurring Revenue 1.86x Executive Summary Company Industry Outlook Investment Thesis Valuation Risks

3 XSELLERATOR Automotive Dealer Management System (DMS) Software
Company Overview Business Description XSELLERATOR Automotive Dealer Management System (DMS) Software Support Support Plus New Installations 73% of revenue ~$2,500 monthly subscription fee per “rooftop” $0.06 per instant message sent to customer 10% of revenue database of training and optimization options $700 + $30 per user per month 8% of revenue $35,000-$40,000 one-time setup fee per rooftop Includes Microsoft SQL cloud server license Management Skin In the Game President and CEO – Maury Marks (1996 – present) Family owned dealership growing up Former Deloitte technology consultant Director – Joe Campbell ( present) President and CEO of 170-dealership automotive group that owns ~10% of Quorum VP Sales and Marketing – Mark Allen (2007 – present) Led launch of GM’s Integrated DMS Program Founder of three start-ups Management’s interests are aligned with shareholders Executive Summary Company Industry Outlook Investment Thesis Valuation Risks Business Description

4 Competitive Advantages Historical Performance
Company Overview Competitive Advantages Gross Margins Integrated with most major OEMs as well as numerous third parties Windows-based software doesn’t require data to be re-entered High dealership satisfaction levels create sticky customers – 2% churn rate Make More Money (3M) feature created $51,321 of incremental revenue per participating dealership in 2015 Historical Performance Rooftops Revenue ($ MM) CAGR: 3% CAGR: 4.7% Executive Summary Company Industry Outlook Investment Thesis Valuation Risks Business Description

5 Not your typical “penny stock”
Company History Not your typical “penny stock” Founded by Maury Marks, current President and CEO Quorum goes public at $0.30/share Company enters U.S. market and develops a direct, collaborative relationship with GM and Microsoft 90% of rooftops are GM dealerships. GM files for bankruptcy and share price touches $0.01 Miraculously, Quorum only loses 4 rooftops in 2009 and the company rebounds from 222 to 240 rooftops Quorum invests heavily into integration with other OEMs and begins posting record profit numbers Business Description Executive Summary Company Industry Outlook Investment Thesis Valuation Risks

6 Competitive Rivalry (3) Threat of Substitution (2)
Porter’s Five Forces Threat of New Entry (3) Requires collaboration and cooperation with OEMs Software industry is asset-light and can be easily disrupted Supplier Power (2) Buyer Power (4) XSELLERATOR is integrated with a number of partners No one partner is integral to the success of the software Competitive Rivalry (3) 59% of customers are GM dealerships Reynolds & Reynolds was able to retain 90% of dealerships when GM dropped them in 2008 Industry has very low churn rate Quorum is prone to buyer concentration risk Threat of Substitution (2) Many competitors but industry has very low churn rate Quorum is already one of the lowest-cost options in the industry Executive Summary Company Industry Outlook Investment Thesis Valuation Risks

7 Industry Outlook Total Addressable Market (TAM)
~20,100 automobile dealerships in North America Top two DMS software providers (CDK Global and Reynolds & Reynolds) have 80% of rooftops in North America Franchising laws require OEMs to sell vehicles through dealerships Total Addressable Market (TAM) Manufacturer Total Canada* Total United States* GM 380 2500 Chrysler 250 850 Hyundai/Kia 185 972 Toyota 150 1233 Ford/Lincoln 360 3600 Nissan 130 1057 Volkswagen (2016) 70 315 Honda and Other (2017) 275 1034 *Rooftops not part of a multi-OEM dealer group (e.g. Autonation, etc.) Industry leaders rely on acquisitions for growth 10+ privately-held DMS providers acquired since 2014 Universal Computer Systems acquires Reynolds & Reynolds Cox Automotive acquires Dealertrack Systems Dealertrack Systems acquires Arkona Inc. Dealertrack Systems acquires Incadea 2006 2007 2014 2015 $2.8 billion 2.9x EV/Recurring Rev. 18.1x EV/LTM EBITDA $58.9 million 7.5x EV/Recurring Rev. 98.2x EV/LTM EBITDA $122 million 3.4x EV/Recurring Rev. 22x EV/LTM EBITDA $3.7 billion 9.4x EV/Recurring Rev. 3.75x EV/LTM Rev. Executive Summary Company Industry Outlook Investment Thesis Valuation Risks

8 Financial Metrics Gross Margin EBITDA Margin Return on Equity
FCF Yield Executive Summary Company Industry Outlook Investment Thesis Valuation Risks

9 Tricor Automotive Group
Investment Thesis Dealertrack Tricor Automotive Group December 2014 – Dealertrack announces purchase of German DMS provider Incadea January 2015 – Dealertrack announces they are withdrawing from Canadian market Implementation problems were having a disproportionate impact on their reputation Dealertrack recommended competitor, Serti, as an alternative Support for 130 dealerships ending December 31, 2016 – Quorum believes they can get of these December 2015 – Tricor instigates private placement of 8.9 mm shares at $0.35/share Tricor purchases over 50% of the placement and their President joins Quorum’s board Tremendous financial incentive for Tricor to switch all 170+ of their dealerships to Quorum Implementation will begin late 2016 due to capacity constraints Executive Summary Company Industry Outlook Investment Thesis Valuation Risks

10 Lifetime value with no rooftop growth Signs nobody is paying attention
Investment Thesis Lifetime value with no rooftop growth Signs nobody is paying attention Revenue per rooftop Month Quarter Year $2,083 $6,250 $25,000 Maintenance Margin 35% EBIT $8,750 Tax Rate 27.5% AT Profit $6,344 Discount Rate 12% Churn 2.5% Lifetime Value $43,750 # of Rooftops 316 Base Value $ 13,825,000 Net Cash $4,791,231 Implied Value $ 18,616,231 Current Market Cap $21,544,444 Downside -13.6% Low liquidity and nano-cap classification prevent many people from investing… Institutional investors = 1 (Voss Capital) Analysts covering Quorum = 0 Corner of Berkshire and Fairfax/Value Investor Club write-ups = 1 (by Voss Capital) Reddit/Sum Zero/Seeking Alpha write-ups = 0 Seeking Alpha members with QIS in their portfolio = 23 (compared to 1,634 for CDK and 994 for Dealertrack) …And management isn’t helping Conference calls = 0 Investor presentations/conferences = 0 Public filings disclosing Tricor’s stake = 0 Executive Summary Company Industry Outlook Investment Thesis Valuation Risks

11 Valuation II: Discounted Cash Flow Analysis
Revenue Growth Assumptions 4% 4% 4% 14% -3% DCF Inputs Sensitivity Tables Beta (5 yr) 0.22 EV/EBITDA Exit Multiple 13x Rf 1.75% EV/Recurring Revenue Exit Multiple 3x EMRP 5.12% PV Enterprise Value $23.7mm E/Value 99% Net Cash $4.79mm D/Value 1% Equity Value $28.5mm Illiquidity Premium 9.12% Shares Outstanding 51.3mm WACC 12% Target Price (50% of both exit multiples) $0.58 EV/EBITDA Exit Multiple $0.57 11x 12x 13x 14x 15x WACC 10% 0.57 0.60 0.62 0.65 0.68 11% 0.54 0.59 0.64 12% 0.52 0.61 13% 0.50 0.56 0.58 14% 0.47 EV/Recurring Revenue Exit Multiple $0.60 2x 2.5x 3x 3.5x 4x WACC 10% 0.52 0.58 0.65 0.71 0.78 11% 0.50 0.56 0.62 0.68 0.75 12% 0.49 0.55 0.60 0.66 0.72 13% 0.47 0.53 0.64 0.69 14% 0.46 0.51 0.61 Executive Summary Company Industry Outlook Investment Thesis Valuation Risks

12 Risks Risk Mitigated by…
Customer concentration – 59% of rooftops are GM dealerships GM removes Quorum from DTAP program Cyclical downturn – Vehicle sales fall from their current peak Technological disruption – Innovation is overdue in the DMS software industry Management execution – Successful Dealertrack/Tricor rooftop implementation is critical to Quorum’s future Liquidity – Less than $5,000 worth of shares are traded per day Short-term contracts – Contract can be terminated by a dealership at the end of every month Quorum continues to make significant investments in R+D to expand XSELLERATOR’s OEM compatibility Reynolds and Reynolds retained ~90% of their dealerships after GM severed ties in 2008 Quorum only lost 4 rooftops in 2009, a “black swan” year for the company High switching costs create sticky relationships and make dealerships resistant to change Management has acknowledged this and intends to space out rooftop growth over the next few years (+15%, +25%, +30%, etc.) Liquidity premium applied to WACC. Illiquidity also incentivizes management to pursue a private acquisition Quorum’s churn rate was returning to pre-crisis levels when they stopped reporting total rooftops and new installations at the end of 2012 Executive Summary Company Industry Outlook Investment Thesis Valuation Risks

13 Appendices Projected Statement of Cash Flows Projected Balance Sheet
Projected Income Statement Taxes Paid Revenue Projections – Rooftops Investment Tax Credits Net Operating Losses Depreciation Schedules Revenue Projections – Segments Operating Expense and Debt Repayment Gross Margin Projections Total Addressable Market Projections XSELLERATOR Functionality Historical Churn Rate Historical Shares Outstanding XSELLERATOR Partners Historical GM Rooftop Concentration December 2015 Private Placement QIS Hiring 2016

14 Financial Statement Projections – Balance Sheet

15 Financial Statement Projections – Cash Flow Statement

16 Financial Statement Projections – Income Statement

17 Financial Statement Projections – Taxes

18 Financial Statement Projections – Net Operating Losses

19 Financial Statement Projections – Depreciation (1/3)

20 Financial Statement Projections – Depreciation (2/3)

21 Financial Statement Projections – Depreciation (3/3)

22 Revenue Projections – Rooftops

23 Revenue Projections – Segments

24 Gross Margin Projections – Segments

25 Total Addressable Market Projections

26 Operating Expense and Debt Repayment Assumptions

27 XSELLERATOR Functionality
Sales Workflow Showroom Vehicle Search Desking (e.g. write-up of quotes and scenario analysis) 4. F&I 5. Back Office 6. CRM Parts Workflow CRM Inventory Search Price and Quoting Inventory Processing Inventory Management Service Workflow CRM Service Appointment Management Electronic Work Orders Service Quoting Work Order Closing Accounting Workflow Vehicle Inventory Vehicle Sales Service Part Sales Parts Inventory

28 Historical Churn Rate Rooftops lost/average dealerships per year
Management refused to disclose total installation numbers

29 Historical Shares Outstanding
December 2015 private placement initiated by Tricor Automotive Group CFO does not anticipate any further shares issuances

30 XSELLERATOR Partners (1/2)

31 XSELLERATOR Partners (2/2)

32 December 2015 Private Placement

33 QIS has rapidly increased their hiring in 2016
Implies ~110 total employees as of March 2016

34 Historical GM Rooftop Concentration


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