Quartix Holdings PLC (LON:QTX) is a UK-based telematics firm with growing recurring revenues from fleets in the UK, US and France as well as a driver monitoring system ‘Powered-by-Quartix’, which it sells into the insurance and fleet markets. The group has been investing heavily in building marketing and distribution in the US and France, which has had a negative effect on costs in recent years. Nevertheless, the potential from these markets adds to what we see as Quartix’s “invest for a generation” features, which include high 70% recurring revenues, low customer churn (10%), major management buy-in (CEO Andy Walters owns 37%), a cash-rich balance sheet and FY17 yield of 3.8%. The stock trades at a substantial premium to the sector on an FY18e P/E of 29.5x, but for long-term investors this may be a price worth paying.
Back to double-digit growth after insurance pull-back
The group increased its fleet subscriber base by 20% to 105,200 in FY17. Sales channel optimisation drove 16% growth in the UK subscriber base to 83.2k while expanding marketing channels and investment in management led to the French and US subscriber bases growing by 31% and 48%, to 13.0k and 9.1k respectively. This helped fleet subscription revenues, which make up 70% of group revenues, grow by 14%. Nevertheless, group revenue rose by only 5%, (10% y-o-y in H217) due to management’s decision to withdraw from lower-margin sales to insurers, a reflection of its ongoing focus on profitability.
Growing pains, future gains
The recruitment of new management, higher share-based payment expense and expansion into new marketing channels in the US and France affected overall costs and contributed to a 1.0pp decline in the FY17 EBITDA margin to 27.7%. Management intends to increase marketing spend in the US in FY18 to build a network of distributors to leverage staff investments and implement a new marketing automation platform in H217. We expect this strategy to contribute to earnings momentum from FY19 helped by the strong R&D-fed product pipeline.
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