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