This analysis is not too deep, but I note that the IPO of Q4 Inc. (TSX: QFOR) had a tepid reception by the market – the IPO price was CAD$12 and the stock traded mildly under this after opening.
Q4’s primary function is to provide an investor relations portal for companies. It’s a distinct market and from what I can tell, the software does add value by offloading various functions that corporate secretaries would have to handle themselves (such as virtual AGM processing).
From the prospectus, we have:
As at June 30, 2021, approximately 50% of the companies that comprise the Standard and Poor’s 500 Index (“S&P 500”), 63% of the companies that comprise the Dow Jones Industrial Average (“DOW30”) and 48% of the companies that comprise the Russell 1000 Index (“Russell 1000”) are Q4 customers, and these numbers and their associated revenues continue to grow quickly
This is a reasonable sample – half of the Russell 1000 use this software.
Indeed, on June 30, 2021, there were 2,505 customers of this software. For the first half of the year, the average revenue per account was US$18k.
The IPO valuation is CAD$510 million on a fully diluted basis. The balance sheet is relatively clean, and they’re looking to raise CAD$100 million for the next ramp-up. The reason for this is despite them obtaining a credible variety of customers, they still have not been profitable.
This is a pretty good example in my books as a software-as-a-service that is scale limited and does not deserve a typical SaaS valuation.
There are two general issues here. Scale and competition.
On scale, how many publicly traded companies are there in North America?
The TSX and TSXV combined have about 3,300 listed companies. The NYSE has 2,300, Nasdaq about 3,700. Then the next tier, CSE is about 720, and OTCBB/Pink Sheets (which also covers international tiers and is quite redundant). I’m ignoring international (a logical audience would also be Australian and UK companies). Let’s ignore OTCBB and international for now and just focus on the first few – we have 10,000 listed companies as the target market.
They’ve already penetrated a quarter of this market. On a logistic curve, they are probably well past the half-way point on the y-axis in growth.
However, let’s say they manage to obtain 100% of their potential client base (a huge and unrealistic and wildly optimistic assumption). That’s a US$180 million revenue stream, a good chunk of money. But that’s the best case scenario short of offering parallel software packages to boost per-customer revenues.
The SG&A and marketing expenses of a software provider are not to be underestimated, let alone R&D expenses. They are material. One would think they will scale down, but it never quite ends up working that way.
Finally, there is competition – the cost of a company to switch to another provider. In the IR space, one would surmise it would be easier to transition than some other mission-critical software applications where discontinuity means death to a business. For US$18k/package, it is a trivial expense for many corporations. This works in favour of Q4, but as they try to raise the per-customer spend, it will most definitely attract competition of some type.
For these simple reasons, Q4 is a company I am not too interested in at this valuation. They have a good niche, but just because your company is in the SaaS domain does not mean you deserve Constellation Software valuations (currently 8 times sales). Good on Q4, however, for raising CAD$100 million. I think they hit the market at precisely the right time.