Q4 Inc is a compelling investment, says National Bank

New quarterly numbers from capital markets tech company Q4 Inc (Q4 Inc Stock Quote, Charts, News, Analysts, Financials TSX:QFOR) brought mixed results, according to National Bank Financial analyst Richard Tse. But in a review for clients on Wednesday, Tse maintained an “Outperform” rating and C$5.00 target, saying the stock offers a compelling risk/reward.

Toronto-based Q4 published its fiscal fourth quarter 2023 results on Wednesday for the period ended June 30, 2023. The company posted revenue up ten per cent year-over-year to $15.1 million and an adjusted EBITDA loss of $3.8 million compared to a loss of $8.7 million a year ago. (All figures in US dollars except where noted otherwise.)

The company, whose platform facilitates interactions across the capital markets, offers tools such as investor relations CRM, analytics, surveillance and virtual events solutions. Over the quarter, Q4 said it had over 2,000 clients and agencies active on its platform, while it launched its Earnings Lifecycle application for supporting the planning, execution and impact of quarterly disclosures.

“During Q2, and throughout the last twelve months, the innovations coming from our platform strategy drove increased product adoption, ARPA growth and client loyalty,” said Darrell Heaps, Founder and CEO, in a press release. 

“Major structural changes have been put in place over the last year which have reduced operating costs and driven significant margin improvement. We expect to exit 2023 with gross margin in the mid 70’s compared with 59 per cent for the full year 2022,” he said.

On the quarter, Tse said Q4’s $15.1 million topline compared to the National Bank estimate at $15.2 million and the consensus call at $15.0 million, while the negative $3.8 million in adjusted EBITDA was a larger than expected loss compared to Tse’s forecast at negative $2.8 million and the Street’s estimate at negative $3.1 million.

Among the key takeaways on the quarter, Tse said annual recurring revenue was up 4.5 per cent to $55.8 million, but it appears that Q4 lost 12 potential prospects that were in its backlog. But Tse said despite the churn, controllable retention remains reasonably solid at 93.5 per cent.

“Despite the mixed results, the Company is progressing on its profitability targets through expanding margins and at 1.4x EV/S F23E, the risk-to-reward profile looks compelling, particularly for a name that appears to be on track to exiting F23 with a positive Adj. EBITDA. Outperform,” Tse wrote.

Tse reiterated a 12-month target of C$5.00, which represented a projected one-year return of 30 per cent.