Small Cap Canadian Software Stock with Sticky Revenue

Quorum Information Technologies Inc’s (TSXV:QIS) EBITDA is expected to grow at a 48% CAGR from 2018 to 2021, driven by top-line growth and margin expansion

Capital Ideas Media | November 25, 2019 | SmallCapPower: Naturally, we like it when our investment ideas work out, and we hope you make some money along the way. A case in point is Quorum Information Technologies Inc. (TSXV:QIS), which we featured as a cover story in December of last year based on a Beacon Securities report.

(Originally published on Capital Ideas Media on September 10, 2019)

The stock has risen 53% since then and could gain another nearly 40%, according to new research from Cormark Securities, which has started coverage of the company with a “buy” rating and a price target of $1.40 a share.

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Here are a few excerpts from Cormark’s report:

Quorum Information Technologies is a Calgary-based software vendor focused on the North American auto dealership market.

Its XSellerator dealership management system (DMS), DealerMine Service customer relationship management (CRM) and related systems have over 1,000 customers and an annual software as a service (SaaS) run-rate of $22 million.

QUORUM INTEGRATION TIMELINE

The DMS is the core accounting system for the dealership and touches sales, service, inventory and human resources. As a result, churn is low and the average life cycle of a DMS is about 20 years.

With the average dealership subscribing to 10-15 pieces of software, Quorum has been building and buying an end-to-end software bundle, providing the company with cross-sell and margin expansion opportunities.

With all the core software pieces now in place, Quorum can bundle its offering at attractive prices to gain share, particularly with dealer groups.

In addition, we expect Quorum to continue to add new software and customers via mergers and acquisitions. Quorum is trading at 1.9x 2020 sales and 10.3x 2020 EBITDA, below our small-cap SaaS comps set at 13.3x.

What we like about Quorum:

  • Large Market:The automotive dealership software market is large and highly fragmented, providing a long runway for organic and inorganic growth.

XSELLERATOR ROOFTOPS

  • Sticky Revenue:DMS touches all dealership divisions and are central to the day-today operations. As a result, switching costs are high and revenue is sticky.

ONTHLY XSELLERATOR SAAS REVENUE/ROOFTOP

QUORUM REVENUE SEGMENTATION

  • Cross-Sell Opportunity:Quorum has acquired several layered applications and built new functionality that can be cross-sold into the DMS base.
  • Strong Earnings Growth:We expect EBITDA to grow at a 48% CAGR from 2018 to 2021 driven by top-line growth and margin expansion.
  • Attractive Valuation:Despite ~$20 million in recurring SaaS revenue, Quorum trades at just 1.9x 2020 sales and 10.3x 2020 EBITDA.

QUORUM INFORMATION TECHNOLOGIES INC. (TSXV:QIS) | 10YR CHART

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