Good afternoon,
I've been luck enough to have been given permission to do my own, slightly condensed, spin on this excellent QPPSAG post:
http://qppsag.wordpress.com/2014/10/16/revenue-kpis-and-cash-after-quindells-q3-2014-trading-update/
I'm going to go into a little more detail regarding the visual trends that are now pretty strong within Quindell's results and as per usual, I have a long position in this company and believe that it will go on and continue to achieve great things in the immediate and longer term future.
1. Revenue Guidance and Cash Flow:
Some people in the market (mostly journalists) seem to have decided that revenue was a company selected Key Performance Indicator (KPI). Well, it wasn't, so that's that. Please feel free to correct me though if you can find a direct RNS quote that says otherwise.
Secondly, we saw a fall in revenue guidance and I hate to adopt a heated attitude, like a certain other blogger, but this point winds me up. If the market supposedly wasn't happy with the net cash position and wanted the growth rate of the company to fall, in order to allow a stronger net cash position to come through, then what else did they think was likely to happen to revenue?
I think it's highly unfair to demand something that you know will likely impact revenues and then complain about it! This is especially annoying when you consider that the business model works on the basis that revenues were always likely to fall and investors were made aware of this many times in RNS':
“The Group continues to be successful in driving down the cost of claims for the insurance industry through programs such as its collaboration protocol with at-fault insurers, which in turn drive down turnover for the Group whilst maintaining or improving the Group's margins”
Now, this doesn't mean that the company is self-discriminated for failure (as some have alluded to), but that the group's total revenue will fall while its EBITDA, cash and profit positions (all going to plan) will rise.
Quindell do also have a very strong track record of over-exceeding their own estimations, so I would likely point out that if they go down their usual route, investors will probably still see this lowered revenue guidance being beaten and as the QPPSAG point out:
"if some NIHL cases settle earlier than the 18 months or so assumed in guidance and at higher fee settlements, which appears to be happening. That'll mean they can both book the full revenue for those cases and have more funds for taking on other work."
2. Projections:
It's for points like this where I feel I ought to remind people that everything I write is not to be taken as investment advice, I'm not FCA registered, etc.
In many respects, this graph is not designed to actually tell you anything, but to give you an idea of where Quindell is headed in the future.
This graph below is what we get if we plot some of Quindell's past revenue data with their adjusted EBITDA margins. Now, there could well be a some human error here and people who are maths savvy will notice that I've multiplied up the EBITDA margin by ten in order to display the pattern clearer (really I suppose I should have logged this data, but I'm saving myself time before I go out).
Therefore, when you read this you should divide the EBITDA margin by ten and that will give you the actual figure at that point in time.
Some of you will also notice that I've skipped some data, this was not because I have a data-snooping bias, but because I was finding it difficult to find the exact data (later reports are much more organised) and I was also trying to save myself time.
Analysis:
Now, I should point out that financial data of this type is horrible to find strong mathematical correlations in, because it's so volatile in nature and this is why I haven't bothered to give or explain any Pearson Coefficient values for this graph (for those interested if you ran it you would get a very weak negative correlation of -0.0012). Therefore, we shall resort to using visual trends on this graph (a ruler may come in handy here).
The really important point though is that although we don't have a lot of data to work from, there is a clear visual trend to the upside for revenue, which even if you just follow linearly upwards over the full year results gives you a strong impression of the future (at least over the next year or two - I would never be so arrogant as to rule out potential problems).
However, as we discussed earlier on, the business model itself will mean that revenue figures will inevitably begin to fall at some point over the longer term, which is why I've put Adjusted EBITDA margins on this graph, so that we can perhaps get a better idea of what will eventual go on:
- Currently, EBITDA margins are following a very gradual uptrend, while revenues are following a strong uptrend.
- As the business model furthers itself, we should see this trend reverse with Adjusted EBITDA following the stronger uptrend while revenues form a weaker trend (probably either at a more flattened level or slightly to the downside). Personally, I think that we're not likely to see year on year falling revenues for a long time, but that we should not rule out a slowing of revenue growth - it is after all part and parcel of the business!
Conclusion:
I hope that I've been able to at least partially clear up any outstanding issues to do with revenue and EBITDA correlations and the business model itself. I also hope that cash flow worries are reduced - this being said I don't think that it's ever been the bulls who've doubted the cash position!
All the best,
The Masked AIM Trader
The really important point though is that although we don't have a lot of data to work from, there is a clear visual trend to the upside for revenue, which even if you just follow linearly upwards over the full year results gives you a strong impression of the future (at least over the next year or two - I would never be so arrogant as to rule out potential problems).
However, as we discussed earlier on, the business model itself will mean that revenue figures will inevitably begin to fall at some point over the longer term, which is why I've put Adjusted EBITDA margins on this graph, so that we can perhaps get a better idea of what will eventual go on:
- Currently, EBITDA margins are following a very gradual uptrend, while revenues are following a strong uptrend.
- As the business model furthers itself, we should see this trend reverse with Adjusted EBITDA following the stronger uptrend while revenues form a weaker trend (probably either at a more flattened level or slightly to the downside). Personally, I think that we're not likely to see year on year falling revenues for a long time, but that we should not rule out a slowing of revenue growth - it is after all part and parcel of the business!
Conclusion:
I hope that I've been able to at least partially clear up any outstanding issues to do with revenue and EBITDA correlations and the business model itself. I also hope that cash flow worries are reduced - this being said I don't think that it's ever been the bulls who've doubted the cash position!
All the best,
The Masked AIM Trader
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