July 27, 2020 - 12:51pm EST by
2020 2021
Price: 0.26 EPS 0 0
Shares Out. (in M): 30 P/E 0 0
Market Cap (in $M): 8 P/FCF 0 0
Net Debt (in $M): -2 EBIT 0 0
TEV (in $M): 6 TEV/EBIT 0 0

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AirIQ was once a high-flying darling during the internet era and its share price reached $1,000 per share. It has been the perfect short since then as the stock declined and now trades for $0.26. Today, AirIQ is a nano-cap with a recurring revenue model that has the potential to almost double in price and the chance to be acquired given its ownership structure.
Business Overview
AirIQ was established in 1997 as a telematics provider in the North American transportation industry. They currently offer asset management solutions to fleet operators and vehicle owners. Their product and services include: instant vehicle locating, boundary notification, automated inventory reports, maintenance reminders, security alerts and vehicle disabling and unauthorized movement alerts.
AirIQ’s web portal is known as AirIQ Fleet. It’s sold under a recurring revenue model and allows fleet operators to easily track their fleet’s health, location, among other data points in one central location. Currently, AirIQ’s recurring revenues represent approximately 58% of sales over the past year, down from 74% of sales in the year prior. The telematics market is very competitive. There are many software and sensor providers that compete within this market including, Verizon Connect, Fleet Complete (AT&T), Geotab, and MiX telematics (MIXT). The primary difference between AirIQ’s products and those of competitors is their electronic
control module (ECM). The ECM module allows AirIQ to deliver reports on engine, transmission, and emission related problems, while many competitors do not provide this functionality. Sales of their ECM module were the primary driver behind hardware revenue growth during the last fiscal year.
Underappreciated Recurring Revenue
AirIQ’s recurring revenue is generated from their AirIQ Fleet application sales. The application’s selling features are that it is easy-to-use for small fleet operators and that it comes with additional features that most competitors do not provide. The usual term length for a contract is 24 months.
While recurring revenue growth was only 8% over the past year, while hardware revenues were up 118%, management continues to focus on growing the former revenues due to their much higher margins (77% vs 14%). They’ve been successful in doing so as revenues have grown from $2.1M in 2015 to $2.9M today. During this period, revenues grew consistently year-over-year, with the exception of 2016. FY 2016 was unusual due to the shutdown of 2G by service providers which affected legacy contract sales. While COVID will have an impact on sales, we believe that AirIQ Fleet revenues will continue to grow at 8-9% when the economy returns to “normal”AirIQ trades at a discount to its’ valuation as a SaaS company. The closest publicly traded comparable (MiX Telematics) trades at 1.5x EV/Revenue. Applying that multiple to AirIQ’s recurring revenue segment would result in a share price of $0.222, which is in the range of the current valuation. Furthermore, the current level of recurring revenue is enough to sustain the business’s profitability as it more than covers its’ operating expenses. Continued growth within this segment should result in significant increases in profitability for the underlying business.
Operating Leverage
The business, as it stands, has significant operating leverage. While revenues have grown from $3.2M in FY2016 to $5.0M today (increase of $2.8M), operating expenses have only grown from $1.2M to $1.65M (increase of $450K). As business revenues continue to grow, we expect operating margins to continue to
expand from 18% in 2019 to somewhere in the low-to-mid 20s over the next few years. The potential growth in profitability is not reflected in the current multiple of ~10.9x TTM earnings. Other publicly traded telematics companies, with lower levels of revenue growth, trade at 20-30x TTM earnings.
Twenty percent of the company is owned by Mosaic Partners, a PE firm in Toronto. Their presence should ensure that the company continues to remain shareholder friendly in terms of their capital allocation policies. AirIQ’s management has approval for a buyback of up to 5% of the company. While share repurchases could move the stock higher, it is important to note that the company also had approval for a buyback of 5% of shares outstanding in 2019, but did not purchase a single share. Another twenty percent of the company is owned by Vecima Networks, a Canadian telematics company. As Vecima has a history of acquisitions, they may elect to purchase AirIQ at some point in the future.
Cash and Taxes
The business currently has $2.2M in cash on the balance sheet, with no debt. The only liabilities relate to A/P and deferred revenues (~1.8M in total). They have Canadian tax losses of $8.3M and US tax losses of CAD$10.5M, which should more than offset any income over the next 10 years.
Management is aggressive in their accounting by capitalizing their R&D/software expenses over 5 years. A more accurate method of valuing the company is based on their FCF. Removing working capital (which was a contributor to cash flow in FY2019), the company’s FCF was ~767K. They also benefited from FX conversion (added ~150K or 21% of net income) during FY2019. Adjusting for that one-time event, FCF was approximately $617K, and the company trades at 12.6x FCF. Their closest comparable (MiX Telematics or MIXT) trades at 22x trailing FCF, which represents 75% upside from the current stock price. The valuation has not been adjusted for the $2.2M in cash as it offsets deferred revenue and A/P.
- Nano-cap, subject to lots of volatility
- Cyclicality (supplier to the transportation & logistics industry)


I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- Continued recurring revenue growth

- Takeout

- Buybacks

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