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Recurring revenues make Investorfile stock picks very attractive small cap investments
Posted by: Gerry Wimmer
7/17/2016
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Top Ideas: RDM Corporation (TSX: RC), QIS Information Technologies Inc. (TSXV: QIS), AirIQ Inc. (TSXV: IQ) and Avante Logixx Inc. (TSXV: XX) rank high in recurring revenues, making them more predictable and with appealing takeover valuations.

Recurring revenue is the portion of a company's sales that is highly likely to continue in the future. Revenue that is predictable, stable and can be counted on with a high degree of certainty is a very desirable quality for small cap investments. Because small companies are very vulnerable to unforeseeable events, a recurring revenue base offers small cap investors the visibility into the future and helps minimizes risk.

When evaluating such companies, the quality of the recurring revenue base is an important consideration. High gross margin recurring revenues generated from multiple customers that have low customer churn rates are highly valued.

With this information in mind we list four Investorfile stocks that rank very high in the value of their recurring revenue business model:

1. RDM Corporation (TSX: RC) - RDM has built a growth business based on recurring revenues from payment processing services through its cloud-based Image & Transaction Management System service platform for major financial institutions in the USA. Recurring payment processing services revenue represents approximately 75% of the Company’s total revenues.

2. Quorum Information Technologies Inc. (TSXV: QIS) - Quorum is growing critical mass of installed auto dealerships that supply a recurring revenue stream by paying recurring monthly support and service fees for the Company’s Dealer Management Software offering. Recurring revenue represents approximately 75% of total revenues for the Company.

3. AirIQ Inc. (TSXV: IQ) –AirIQ’s offers a suite of asset management services, end-to-end wireless solutions which allows operators of fleets of delivery trucks, service vehicles and rental or company cars the ability to monitor, manage and protect their mobile assets.Approximately 65% of the Company’s total revenue is recurring from the monthly wireless airtime fees earned from the connection of AirIQ’s GPS hardware devices that are sold and installed on the mobile assets of its customers.

4. Avante Logixx Inc. (TSXV: XX) - Avante Logixx provides best-in-class and high-end residential and commercial security services, including system design and installation, rapid alarm response, alarm monitoring, video analytics, locksmith services and hardware and secure transport through the use of advanced technology. Avante’s monthly monitoring services are provided through multiple channels using different technologies and equipment accounts for about 40% of the Company’s revenues, which are recurring.

The predictability of recurring revenues minimizes the risk and makes for more of an attractive investment. This also often translates into premium takeover offers for publicly listed companies with recurring business models. Depending on industry and company size, recurring revenues can obtain valuation multiplies three or four or five times plus higher than non-recurring revenues.

For a valuation exercise we suggest a potential takeover stock price on our four Investorfile stocks profiled. Our takeover valuations are based our 12-month forward view of each company’s revenues. We valued each company’s annual recurring revenue base at four times, and non-recurring at one time and added any net cash per share to derive a takeover stock value on a fully diluted basis:

Potential Takeover Stock Valuations: (Last close in brackets 7/15/2016)

  1. RDM Corporation -C$6.25 (C$4.48)
  2. QIS Information Technologies Inc -C$1.00 (C$0.55)
  3. AirIQ Inc. -C$0.35 (C$0.115)
  4. Avante Logixx Inc. -C$0.55 (C$0.245)

We note that there are other Investorfile Top Ideas that are growing their recurring revenue base of business. These companies include Intrinsyc Technologies Corp. (TSX: ITC), Sangoma Technologies Corp. (TSXV: STC) and Intouch Insight Inc. (TSXV: INX).

Author Ownership Disclosure:

TSX: RC – Yes
TSX: ITC – Yes
TSXV: XX – Yes
TSXV: QIS – Yes
TSXV: STC – Yes
TSXV: IQ – Yes
TSXV: INX - Yes

Read Disclaimer:

This article is for informational purposes only. This article is based on the author's independent analysis and judgment and does not guarantee the information's accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

Investorfile is not engaged in an investor relations agreement with RDM Corporation, Avante Logixx Inc., Sangoma Technologies Corp., Quorum Information Technologies Inc. Intrinsyc Technologies Corp., Intouch Insight Ltd., and AirIQ Inc. nor has it received any compensation from RDM Corporation, Avante Logixx Inc., Sangoma Technologies Corp., Quorum Information Technologies Inc. Intrinsyc Technologies Corp., Intouch Insight Ltd., and AirIQ Inc. for the preparation or distribution of this article.

The author of this article has acquired and may trade shares of RDM Corporation, Avante Logixx Inc., Sangoma Technologies Corp., Quorum Information Technologies Inc. Intrinsyc Technologies Corp., Intouch Insight Ltd., and AirIQ Inc. and Gatekeeper Systems Inc. through open market transactions and for investment purposes only.

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Hi Gerry, Your philosophy is focused on principles that have been shown to produce above average results over time and your record has clearly proven that. Congratulations on a great blog and thank you for the hard work that you do in sharing and updating your ideas; it is much appreciated.