VIQ Solutions has a 31 per cent upside, says Paradigm Capital

An in-line quarter and good growth prospects for 2021 are keeping analyst Daniel Rosenberg bullish on Canadian tech company VIQ Solutions (VIQ Solutions Stock Quote, Chart, News, Analysts, Financials TSX:VQS). The Paradigm Capital analyst delivered an update to clients on the company on Friday where he maintained his “Buy” recommendation and C$8.75 target price.

VIQ Solutions is a transcription services company providing secure, AI-driven digital voice and video capture technology to highly regulated and compliance-heavy sectors such as law enforcement, legal, insurance and court systems. The Phoenix, Arizona-based company reported its fourth quarter and full year 2020 financials on April 7, showing revenue up 28 per cent year-over-year in the Q4 to $7.8 million and adjusted EBITDA of $0.6 million compared to negative $0.3 million a year earlier. (All figures in US dollars except where noted otherwise.)

For the year, VIQ saw record revenue of $31.7 million, up 27 per cent from 2019, with a net loss of $11.4 million compared to a loss of $4.5 million for 2019.

2020 was a busy year for VIQ, which transitioned its business to a cloud-based model while launching a number of products including FirstDraft, CapturePro Conference, CapturePro On-the-Go and MobileMic Pro.

“We delivered on financial goals, expanded our foundational AI, successfully executed global organizational realignment, and further refined our growth strategies to keep pace with market dynamics. Our significant investment in technology and infrastructure created a solid foundation to scale consistently, steadily becoming the global leader of secure, AI-driven, solutions and services with $32 million in revenue, generating strong 2020 cash flow and Adjusted EBITDA,” said Sebastien Paré, VIQ CEO, in a press release.

As for the current 2021 year, VIQ said it plans to keep investing in AI Machine Learning, its operational infrastructure and organic growth, while pursuing at least two acquisitions. Management declined to provide financial guidance for the year, however, citing uncertainties surrounding the impact of COVID-19.

“As a growth-oriented company disrupting a fast changing global industry, the Company plans on keeping its accelerated investments in the next generation of aiAssist, to scale sales and marketing and to continue to acquire strategic assets worldwide. The Company anticipates these growth-oriented investments may from time-to-time pressure gross margin and Adjusted EBITDA during 2021,” the company said.

Looking at the fourth quarter numbers, Rosenberg said the $7.8 million in revenue was in line with his $8-million estimate and the consensus $7.9 million, while the $0.6 million in adjusted EBITDA was slightly ahead of the consensus $0.3 million.

Rosenberg said COVID-19’s overall impact on VIQ has been mixed, as the closure of court systems as well as a drop in the automotive insurance segment were negative factors, while more business came through conferencing and media which migrated onto digital platforms. Rosenberg noted that management has called for signs of normalization of its business in March.

“Negative organic growth was owing to closures related to COVID, partially offset by increases in the conferencing and media vertical. Gross margins fell to 38 per cent year-over-year (39.9 per cent in Q4/19) because of fixed payroll expenses and accelerated hiring costs of editors. VIQ also recorded an impairment in the quarter of $2.2 million related to its WordZ acquisition, which in turn benefited VIQ with a reduction in earn-out payments of $0.9 million,” Rosenberg wrote.

Organic growth is expected to rebound in 2021 due to catch-up from COVID-related delays spread evenly across quarters. In Q3, VIQ announced a $30 million contract over six years with Queensland’s Department of Justice and Attorney General in Australia, representing ~$5 million in revenue per year. The contract is expected to carry gross margins of 53.5 per cent. We expect the company to increasingly sign larger contracts as it develops deeper relationships with the channel partners,” he said.

Rosenberg thinks VIQ’s investments in its software solutions including in AI and machine learning will drive operational efficiency and eventually generate new high-margin products and services. The analyst has tweaked his forecast following the Q4 results and is now calling for 2021 revenue and adjusted EBITDA of $44.6 million and $5.0 million, respectively, and 2022 revenue and adjusted EBITDA of $55.0 million and $9.7 million, respectively.

On valuation, Rosenberg is using a blend of 2022 revenue and EBITDA estimates, applying a 3.5x multiple to his 2022 revenue estimate and a 17.0x multiple to his 2022 adjusted EBITDA estimate, with the result being his C$8.75 target, which at the time of publication represented a projected 12-month return of 31.0 per cent.

“We expect M&A activity to generate $10 million in additional revenue this year,” Rosenberg said. “There is upside to our valuation should the company be more aggressive in its M&A expansion and onboarding of traditional transcription providers.”