Quatrix spending big to get new customers

Quartix Technologies (QTX) provides telematic data analysis services for commercial fleets and insurance providers. In short, it tracks where cars and vans drive. This helps commercial fleets optimise their vehicles and insurance companies price their premiums more accurately.

There is an obvious case for the use of this technology, and this is translating into increased demand. For the half-year ending 30 June, revenue increased 6.7 per cent. Fleet subscriptions increased 25.9 per cent and annualised recurring revenue was up 11.3 per cent to £26mn.

Despite the top line growth, adjusted cash profits fell by 6.4 per cent. However, this was partly due to some accountancy quirks, as the company chooses to immediately recognise hardware and installation costs, despite the fact the revenue will recur over a longer period. This means in the short term, the 26 per cent increase in installations is bad for profits despite the long-term benefits.

Another example of this paradox is marketing costs. Sales and marketing expenses ticked up 10 per cent to just over £4mn and now make up more than half of the total costs. As with any recurring revenue business, it is a race to generate annual recurring revenue (ARR), and that can often mean substantial initial customer acquisition costs.

At a forward PE ratio of 31.5, Quartix looks pricy. The 11 per cent ARR growth is promising but it’s not coming cheap, given rising marketing spend. To justify the valuation, the company will need cash flow way out in the future. With the car industry changing rapidly and the prospect of automated vehicles emerging in the mid-to-long term, there is no guarantee that the same insurance market customer base will stay in place. Sell.   

Last IC View: Buy, 385p, 1 March 2022