PI Financial cuts price target on Quorum Information

Expect stronger headwinds for Quorum Information Technologies (Quorum Information Technology Stock Quote, Chart, News TSXV:QIS), says PI Financial analyst David Kwan, who on Monday published a report to clients on the company’s upcoming fourth quarter financials.

Kwan kept his “Buy” rating with the update but dropped his target price from $1.65 to $1.30 per share, which at press time translated to a projected 12-month return of 41 per cent.

Calgary-based Quorum, a developer and marketer of the XSellerator dealer management system (DMS) for auto dealerships, is expected to release its fourth quarter fiscal 2019 results on Wednesday after market close, with a conference call the following day.

Kwan’s forecast is for Q4 revenue of $8.6 million compared to QIS’s $5.9 million achieved a year ago and adjusted EBITDA of $1.4 million compared to $1.9 million a year ago.

The analyst said solid and steady quarter-over-quarter growth in SaaS revenue should be the order of the day along with flat sequential total revenue growth on account of a very strong Q3. Quorum’s year-over-year results should benefit from a full quarter from DealerMine and Oasis, the latter acquisition which closed in January.

Yet Kwan pointed to significant challenges for QIS stemming from COVID-19 and its impact on the auto sector.

“While most of its revenue is SaaS (close to 70 per cent on a trailing 12-month basis), QIS is completely exposed to the cyclical auto industry, which is experiencing a significant COVID-19 driven downturn. In Canada (accounts for ~80 per cent of its DMS customers), auto sales were down 48 per cent year-over-year in March, while in the US, most auto manufacturers saw sales down ~30-50 per cent last month. The declines were driven by a drop in demand as well as the temporary closure of dealerships’ in-store sales departments (some are still keeping their service departments running, typically at reduced levels),” Kwan wrote.

Both auto manufacturers and dealers are feeling the crunch, with some more than likely to close the longer the social distancing shutdowns are in place, Kwan said.

“Suppliers/vendors to the industry will also be negatively impacted, including DMS vendors like QIS, who we believe will need to provide financial concessions to their auto dealer customers to help them weather this downturn, similar to some of their competitors like CDK,” he added.

Overall, the analyst is expecting the quarterly the results to have a negative impact on the company and stock, with Kwan lowering his fiscal 2020 estimates, including an expected sharp drop in revenue due to temporary pricing discounts, curtailed business development community activity and minimal one-time revenue. The analyst is now calling for 2020 revenue of $26.7 million (previously $37.8 million) and adjusted EBITDA of $1.8 million (previously $6.4 million). His newly-introduced fiscal 2021 forecast calls for revenue and EBITDA of $31.4 million and $3.5 million, respectively.

QIS finished up 2019 up 87 per cent and was continuing on the strong run into February before the market pullback. The stock is down 32 per cent year-to-date.