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Q4 Inc. (QFOR) Stock | TSX: QFOR

Covered by Stratosphere

Connecting Global Capital Markets

Q4 Inc. ("QFOR") is a global capital markets communications platform provider. The company currently operates primarily in the US with some operations in Canada and Europe. The customers served mainly include banks, buy-side firms and investors, and public companies.

QFOR operates a comprehensive, yet easy-to-use end-to-end SaaS (i.e., software-as-a-service) platform that facilitates communication between capital market participants. The platform includes website, virtual events, CRM, and analytics capabilities that help capital market participants make more informed decisions and communicate with one another.

Stratosphere Score

7

Growth

10

Valuation

9

Quality

6

Margins

5

Dividend

0

Balance Sheet

10
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

Investment Thesis

  • QFOR is the provider of a sticky and easy-to-use communications platform used by public companies, investors, and banks. The platform provider seeks to facilitate information flow between these capital markets participants for more effective communication between each of them.

  • The company benefits from network effects and high switching costs as more participants use and interact with the platform. More users on the platform means easier communication between capital markets participants, more features being introduced on the platform by QFOR, and better analytics stemming from more intricate data collected and interpreted by QFOR over time.

  • QFOR has only captured about 6% of its total addressable market. Over 2,600 customers have contracts with QFOR today, however, there are over 43,000 public companies listed around the world. Additionally, QFOR seeks to expand the platform to develop communications services for the buy-side and sell-side firms as well.

  • We see various risks with QFOR, although they are not specific to the company. We view QFOR as a leading provider of investor relations communications solutions with high-calibre clients across the US (including Netflix, Nike, and many others), but we cannot dismiss several risks. The company is not yet profitable, and the optionality from the platform may be limited given the focus on investor relations.

  • Overall, we believe QFOR has a strong runway with few eyes on the company today. The company is growing quickly behind the scenes, and it already scooped up some of the most influential brands in the world as customers. We think the large target market creates a long runway for growth.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Platforms Win

The goal and nature of QFOR's business is to connect capital markets. There are three main participant groups that make up what are the "capital markets":

  1. Investment Banks (i.e., sell-side)

  2. Investors (i.e., buy-side firms and individual investors)

  3. Corporates (i.e., companies communicating information with both the buy-side and sell-side)

QFOR conveniently sits in the middle of this interconnected triangle of stakeholders when it comes to investor relations functions and communications.

Unlike other investor relations service providers, QFOR is an end-to-end capital markets platform with powers websites, virtual events, CRM, and analytics.

QFOR's E2E PlatformSource: QFOR Q4 2021 Investor Presentation

Today's market offerings are typically siloed services with low levels of interactivity. By focusing largely on the "foundations" of investor-bank-corporate communication, QFOR has been able to make communication between these parties more efficient by unifying investor relations workflows.

In the words of Darrell Heaps, QFOR's President & CEO, platforms win. By providing simple software that is easy to use and requires no advanced IT knowledge, QFOR's customers can be onboarded quickly, and investor relations teams easily trained.

More importantly, the software is far from clunky. The platform can be modified to fit within any company’s investor relations function. QFOR can be used by small public companies as well as megacap technology companies. This enables QFOR to grow with its customers - no company is too big or too small.

Network Effects

QFOR's business has grown quite large, albeit behind closed doors. While the company is relatively small compared to other companies we cover, the impact it has had on the market speaks volumes. Today, QFOR serves 2,600 corporate clients.

We note there are over 43,000 publicly listed companies that exist around the world. On that statistic alone, QFOR appears to have captured only a small subset of customers (~6%), bearing in mind the company operates primarily in the US and Canada now.

Over time, QFOR is aiming to capture a far greater number of this total addressable market. What’s more is that the capital markets function as a network - it is the interaction of investors, the buy-side, sell-side, and corporations that make capital markets work.

QFOR Capital Markets NetworkSource: QFOR Q4 2021 Investor Presentation

QFOR has enabled a large and growing network of millions of people and firms combined. These users interact with each other constantly, creating an ecosystem that will be difficult for other capital markets platforms to disrupt.

Additionally, the company's data-driven and direct-to-investor approach has several advantages that contribute to the strength of the platform’s network effects:

  • QFOR's ability to collect data from users can be used to enable customers to understand patterns and sentiment within their shareholder bases. In other words, corporate customers are better able to identify what buyers and sellers of their stock or debt are satisfied or concerned with using QFOR. This will help customers tailor their communications, engage the right stakeholders in their communications, and clear up any confusion about the company that may be weighing on current share price or the company’s ability to raise capital.

  • Buy-side firms and investors typically had to go through sell-side firms to engage directly with a company of concern. With QFOR's direct-to-investor capabilities, that middleman is cut out of the process, allowing companies to get in touch directly with investors and vice versa.

  • Sell-side firms leverage QFOR's infrastructure and analytics capabilities to build complex virtual / hybrid event schedules for investors (which are increasingly going online) and help those corporate access teams to manage these dynamic schedules.

As the company grows, these network effects will become stickier. Terminating a contract with QFOR would, in essence, cut off the ability to interact with millions of stakeholders efficiently. The immense amount of data QFOR processes each year implies the platform is only getting started. It will only get more efficient and effective from here on out.

Given these facts, perhaps it is no surprise that QFOR is used by the best brands in the world, including Nike, Visa, Salesforce, Coca Cola, Spotify, among many, many others.

QFOR is trusted by over 50% of S&P 500 companies, over 60% of the Dow 30 companies, and around 50% of the Russell 1000 companies. These indices include some of the most influential brands in the world that many other companies aspire to be.

On the investor relations front, we believe it is highly plausible that thousands of other companies find value in QFOR's end-to-end platform to stay in touch with their key stakeholders.

Land and Expand

QFOR's growth plans are predicated on several core beliefs - capital markets participants are facing challenges with today's investor relations software providers, certain capital market participants are underserved, and effective communication between participants are the foundations of capital markets working properly.

As such, QFOR employs a "land and expand" business model whereby it enters a contract with a customer and tries to up-sell complementary products and cross-sell "adjacent" products.

For this strategy to work, the company must continue building on top of the existing platform, continually enabling new features and abilities to meet increasing customer demands.

As mentioned previously, QFOR's ability to leverage the data that flows through its systems gives the company an edge. It can expand monetization of data and build upon the network effects that are inherent in the platform.

To date, QFOR has done a good job introducing new products and increasing its average revenue per account. QFOR has been able to keep churn rates low and net revenue retention rates high, both direct benefits of the value QFOR is able to provide with its land and expand model.

Contractual Protection

QFOR's business is conducted solely through one- to three-year term contracts, with pricing escalators baked in at the end of each term.

Customers cannot easily exit contracts during a term, and, in fact, customers generally do not want to exit contracts. Virtually all customers renew their contracts at the end of their terms and increase their rate of product adoption. This helps drive up average revenue per account.

Thanks to the contractual nature of QFOR's service, most revenues are high-quality, recurring revenues. Customers typically prepay for QFOR's services on an annual or quarterly basis.

Once again, QFOR has a history of increasing its annual recurring revenue as it captures more customers. The contractual, recurring nature of this revenue generation means it is rather simple forecasting revenues over the next one to three years.

Companies with recurring revenues generally trade at premiums in the market to industries or companies that employ volume-based sales models. Investors value predictability highly, and we think QFOR fits the bill.

Opportunities Ahead

  • In QFOR's final prospectus released in October 2021, it was mentioned that over 500,000 investors attend QFOR-hosted virtual events each quarter and around 12 million investors interact with the QFOR platform each month based on the 2,500 customers that used the platform then. The total addressable market of the three major stakeholder groups QFOR serves is about $20 billion today.

  • Since QFOR has only tapped into about 6% of investor relations departments for public companies worldwide, we think there is ample opportunity to grow, particularly outside the US. We think QFOR will become the gold standard across the globe, including the major European and Asian markets given the deep entrenchment and flexibility the platform provides for many of North America's biggest brands.

  • At some point in the future, we expect QFOR to become profitable as it shifts focus from "growth" to "mature". We do not know when that will be, but for now we encourage QFOR to invest in its platform to give it the best competitive edge. We would argue QFOR is already the best platform, but widening its moat in the industry would help it become a powerful aggregator of smaller businesses. If QFOR can grow through business acquisitions too, we think the company will be unstoppable.

Risks

Financial Risks

To no surprise, QFOR is not yet profitable due to the company being situated in the early stages of its growth story. Management alluded to high research & development and sales & marketing costs for the foreseeable future as the company navigates the capital markets communications market and acquires customers aggressively to outperform competition.

We see three major risks regarding QFOR's financial position:

  1. The company is new, unprofitable, and still has relatively low market share. Although we believe the company has a long runway, we have no certainty around what the company's mature revenues and margins will look like, and when.

  2. The company's heavy growth expenditures will continue for some time. The company raised about US$75 million from its IPO. After the 2021 cash burn from operations of $12 million, QFOR has $63 million remaining on its balance sheet. This cash should help cover the company's expenses and liabilities for some time. Additionally, QFOR has access to an additional $22.5 million through a revolving credit facility. Assuming QFOR's cash burn does not exceed $12 million per year, QFOR has about 7 years of liquidity resources to cover its losses. If spending intensifies, QFOR would likely be forced to issue more equity, diluting shareholders. Alternatively, it can raise debt that would be issued at a high interest rate. This could hurt the profitability of the business further, burdening shareholders and limiting reinvestment.

  3. QFOR may need to conduct M&A (i.e., mergers and acquisitions) to grow. Its financial position will likely not support large M&A at this time, meaning that even small acquisitions could result in shareholder dilution or lots of high-interest debt being issued to make the acquisition. The market is highly competitive, so we would not write off the possibility of value-destroying M&A happening, either.

Navigating the Competitive Environment

QFOR operates in an unproven, fragmented industry with many providers tackling different areas of the investor relations market. While the company believes it can leverage its comprehensive platform to "land and expand" its customers, we have two major uncertainties:

  • We do not know how far customer uptake will go. While we are comfortable QFOR provides a great platform given the profile of customer it serves, that value ultimately needs to be discovered by new customers for QFOR to grow. Many customers may be comfortable with their current offerings, or only engage QFOR for certain processes, never expanding on contracted services or fully utilizing the platform as QFOR intends.

  • QFOR has indicated its willingness to grow through M&A. Many of QFOR's competitors are large global information services providers that may be better capitalized and able to grow through acquisitions versus QFOR. This means QFOR might miss out on great M&A opportunities.

We will be monitoring QFOR's KPIs closely. At this early stage of its growth story, we expect QFOR to see both pricing and volume increases driving revenues, given its differentiated platform offering. We think these data points will speak volumes, and any investor should be monitoring them closely.

Limited Optionality

QFOR is focused on the capital markets and facilitating communications between parties in these industries. While QFOR has indicated several avenues for new modules and features that can be introduced onto its platform, we cannot see the investor relations communications industry as one that’s ripe with optionality.

As a SaaS business, its product may quickly become commoditized with no natural ability to bake in price hikes greater than inflation or GDP growth.

However, it is important to stay open-minded in this regard as the company is still new and discovering what the market needs. There appears to be strong uptake of QFOR's platform now with existing customers generally increasing spend each year.

Additionally, QFOR may be able to introduce communications platforms that tackle other niche corporate challenge areas.

Buyback Announcement - Too Early?

On March 23, 2022, QFOR announced a share buyback program to repurchase up to 2.5 million of its shares on the TSX.

The company currently has a public float of 25 million shares. This buyback program represents 10% of the total shares outstanding in public markets.

This program will run through March 2023, unless the company buys back 10% of the public float before that date.

The company currently generates negative free cash flow, yet it announced a buyback plan. We are confused by this move for several reasons:

  • the company still needs to invest tons of cash into sales & marketing and research & development to grow internationally and in the targeted markets. Commencing buybacks at this time takes cash away from these initiatives.

  • the company's negative free cash flow position means it will likely need to borrow money to repurchase shares. We view this as a poor use of capital at this time.

  • the company noted the rationale behind this buyback announcement is because "the market price of the common shares may not adequately reflect their value and that current market conditions provide opportunities for the Company to acquire common shares at attractive prices". While focusing on returning capital to shareholders when a company is gushing cash is welcomed, doing this when the company is trying to grow organically and by conducting opportunistic acquisitions is another potential sign of poor capital allocation.

While these are our initial thoughts, of course, there may be strong reasons behind this move. We believe management may be rationalizing this move due to:

  • the low debt on the balance sheet and high-quality, recurring revenue profile providing the company with some financial safety;

  • the expectation that the company will be free cash flow positive by the end of 2023 and profit positive by 2024, per the latest earnings call. Once profitable on a free cash flow or net income basis, it is possible that shares significantly re-rate upwards, rewarding current shareholders and also giving QFOR the ability to consider re-issuing shares at a much higher price;

  • general confidence in the overall future prospects of the business, which could signal to shareholders that management believes the company is cheap. Volume of the shares could increase and help improve QFOR's reputation among the capital markets community.

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