VIQ Solutions has more upside still, says Paradigm Capital

The future is looking bright for VIQ Solutions (VIQ Solutions Stock Quote, Chart, News, Analysts, Financials TSX:VQS), according to Paradigm Capital analyst Daniel Rosenberg, whose new report on the company on Monday featured a target raise. Looking at the company’s latest quarterly numbers, Rosenberg said improving sight lines on organic growth are keeping him bullish on the name.

Phoenix, Arizona-headquartered VIQ Solutions provides secure, AI-driven digital voice and video capture technology and focuses on highly regulated and compliance-concerned sectors such as law enforcement, legal, insurance and court systems.

The company released its first quarter 2021 earnings on May 13, posting revenue up 9.4 per cent year-over-year to $8.3 million and adjusted EBITDA of $0.3 million compared to $0.6 million a year earlier. VIQ said it saw revenue climb by 22.5 per cent in its Australia business while US revenues dropped 8.6 per cent due to pandemic impacts on its Insurance business. The EBITDA decrease was driven primarily by professional service fees and fees from a TSX uplisting (occurred on January 21 of this year), VIQ said.

Management said 2021 will be a pivotal year for the company, with increased infrastructure investment to support its translation services and the launch of FirstDraft later this year, its cost-effective digitizing of recordings aimed at expanding VIQ’s total addressable market.

“VIQ Solutions delivered strong first-quarter results driven by substantial gross margin improvement, steady increase in our total revenue, and exponential growth in Australia. The positive response to our unique industry transforming approach to AI-powered solutions has been invigorating. Our product portfolio is gaining momentum and we’re keenly focused on strategy and execution,” said Sebastien Paré, CEO, in a press release.

“We continue to see tangible results from our comprehensive strategy flow through our financial statements. We have started to recapture and recognize the backlog revenue as we enter a post- pandemic environment. We experienced positive proof in Australia, where revenues increased 22.5% in the quarter to $2.4 million versus the prior year,” said Paré.

VIQ Solutions was a strong performer in 2020 and has continued to do well so far in 2021, with its share price currently up 37 per cent year-to-date. But there’s more upside to come, says Rosenberg, whose new report included a reasserted “Buy” rating and a target price of $9.75 (previously $8.75). At press time, the target represented a projected one-year return of 18.2 per cent.

VIQ’s first quarter top and bottom numbers were in-line with Rosenberg’s estimates, with the $8.3-million in sales meeting up with Rosenberg’s call for $8.2 million and the $0.3 million in adjusted EBITDA compared to Rosenberg’s forecast of $0.5 million. The consensus calls were for $8.5 million and $0.5 million, respectively.

Rosenberg said the outlook for 2021 is “strong with better clarity on organic growth and a strong pipeline of opportunity.”

“VIQ is a market leader having some of the largest insurance providers, police organizations and court systems globally as their customers,” Rosenberg wrote. “There is an opportunity to capture significant market share by rolling up traditional transcriptionists onto VIQ’s AI-driven platform.”

“The recent consolidation of its global operations is expected to generate $1 million in cost savings annually. Recent capital raise, investment in innovation and tech-focused M&A targets position VIQ to execute large growth opportunities and drive meaningful shareholder value,” he said.

On the M&A front, VIQ ended the quarter with $16.0 million in cash and $13.6 million in debt. The company closed on a $15-million financing this past November, which Rosenberg said should leave the company well capitalized for future acquisitions, as management has said that about 70 per cent of its capital raise should go to M&A, with a lean towards tech-focused targets primarily in data tagging and labeling services where the company sees upselling opportunities.

With the report, Rosenberg has updated his forecast, calling for 2021 and 2022 revenue of $44.7 million and $55.2 million, respectively, and 2021 and 2022 adjusted EBITDA of $4.7 million (was $5.0 million) and $9.8 million (was $9.7 million), respectively.

As for catalysts, Rosenberg pointed to the successful monetization of its AI-Powered FirstDraft audio conversion software, M&A activity and an uplisting to the NASDAQ.

On a comparative basis, the analyst has culled VIQ’s peer group from tech providers using AI for customer service purposes along with Canadian small-cap tech companies, with the result being an average among its peer group of 6.4x EV/Revenue on 2022 estimates versus VIQ currently trading at 3.4x based on Rosenberg’s estimates.

“We believe the company can re-rate higher as it scales and executes its M&A strategy. Additionally, transitioning to a SaaS model is high on VIQ’s priority list. There is potential for the company to re-rate as investors view the company less as a service provider and more as a software company. Finally, a U.S. listing could allow broader exposure to US investors,” Rosenberg said.