MicroCap Tech Earnings April 09: VIQ Solutions (VQS.V) Flat 2008 Ahead of Potentially Big 2009

VIQ Solutions provides digital recording solutions for courts and legal infrastructure throughout the world. It has major deployments in Europe and North America. Uncertainty mounted within the Company's market niche last year as the world economy fell deeper into recession and leadership changed in the United States. Even with really tough market conditions, the Company was able to markedly improve margins heading into FY 2009. Contract signings already announced during H1 2009 point towards a significant upswing in sales growth and earnings for the full year:
  • flat to slightly lower sales of $11.9 million for 2008 versus sales of $12.3 million during 2007. Subsequent to year-end several incremental contracts should re-establish growth for 2009.
  • Although sales were flat for 2008, the revenue mix leaned more towards software licensing than in the past, pushing gross margins to 51% for Q4 2008 versus 36% for Q4 2007. Gross margins should be maintained or grow slightly from there.
  • The company was able to improve EBITDA by $0.5 million moving from a $0.3 million loss for 2007 to a $0.2 million gain for 2008.
  • During Q1, 2009 the Company signed no less than four multimillion dollar contracts with courts from the United Kingdom and Australia.
  • There has been a significant increase in RFPs originating from the United States as Federal Stimulus money allows previously underfunded court systems to invest in modernization.

Most of its client contracts run for between 3 and 5 years with a typical 40/60 split between software licensing and services. A majority of the software licensing revenue occurs within year 1 of the contract. Based on Q1 contracts alone, there could be as much as a 30% lift on annual sales for 2009 with three quarters remaining.

With the Stimulus funding finally reaching the federal, state, and local jurisdictions, Management is detecting significant growth activity within the United States. During the last term of the previous US administration, funding for the courts had all but dried up.

The Company may be cashflow positive on an operating basis now, and with its new margin profile, VIQ may actually be generating free cashflow by H2 2009. The Company has about $1.0 million in cash and $0.5 million in long-term debt. The EV is approximately $24.2 million for this company based on today's shareprice. Some future potential may already be priced into the stock, however there are a lot of big contracts up for grabs, which may infer more upside potential. Without question, this is a microcap story that should benefit from infrastructure stimulus spending by the governments of advanced economies.

Disclosure: I do not own shares of VQS.

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