selling one piece of software to the customer, then cross-selling more software. On the contrary, with XSELLERATOR, outside of a few specific initiatives, there is only one integrated system to pay for, with
semi-annual updates being included as part of the support package. If anything, Quorum has lots of room for price escalators to be built into contracts. As we understand after many calls with management and customers, prices haven’t been raised at all in at least the last ten years, which is quite baffling…but right now they are stealing market share by having the reputation as being the lower cost
but equal functionality solution to the larger players. A verbatim quote from a customer is "a key advantage for Quorum is their technology. Large incumbents built their system pre-Windows, which is
real dinosaur tech that they've been taping and tacking on ever since." We estimate that QIS cost ~50-60% less than CDK or Reynolds & Reynolds despite the same functionality, and better architecture, UI,
and adaptability for Xsellerator. Any future price hikes will fall directly to the bottom line. We would like to see, at a minimum, price escalators built into new contracts at a CPI rate.
2) Support Plus Revenue – this is subscription based training services. This encompasses a $700 one- time licensing fee per rooftop and then a $30/month/user subscription fee. We anticipate Support Plus revenue exceeding $1mm from 2016 and beyond. This is very profitable at a ~60% operating margin.
3) New Installations – this revenue is generated when the dealership pays for hardware and implementation (Server cost, Microsoft user license). QIS receives ~$35-40k in revenue per new
installation, but this is a breakeven segment for the company. New Installations are the best leading indicator of new business for Support and Support Plus revenue. Given that we expect an acceleration of
New Installations, this will temporarily lower margins but increase the recurring revenue and cash flow run-rate. Management has invested in new implementation capacity to try and keep up with demand
and we forecast about 35 net rooftop adds in 2016. We anticipate an increase in the quarterly new rooftop install rate from ~6/quarter in two of the last three quarters to a 9+ quarterly rate in 2016. New
installation revenue would jump to about a $360k+ quarterly rate if our estimate of rooftop growth is accurate. This is something to watch and is really the key leading indicator.
QIS ended 2015 with ~307 rooftops and historically has experienced only 1.3% customer churn annually. They have grown the installed base of rooftops by a 10.6% CAGR since 2004 and we think can
accelerate growth a bit from here due to a few recent positive developments and a deep pipeline of low hanging fruit to pick, in terms of rooftop growth. 2009 was the only year that Quorum’s installed
rooftops declined, and even then only by 2% due to a ~90% concentration in GM dealers at the time and the GM bankruptcy forced many dealerships to shut down. We think the Great Recession offers the
ultimate stress-test and QIS sailed right through it, posting their first EBIT positive year (EBIT positive every year since) and rebounding from 222 dealers to 240 the next year.
4) Transitions – this is revenue generated from upgrading customers to the latest version of Microsoft and installing new hardware. This is a lower margin segment and declining, with the bulk of
Transitions on the existing dealer installed base completed in 2013 and 2014. Gross margins for this segment are around 30% and operating margins around 10% or lower. We conservatively model this as
declining about 20% a year the next several years.