Qt Group Company report 1/2019 Inderes Commissioned Research Qt Group Company report Jan 9, 2019, 8:00 Analyst Heading for scalable growth Mikael Rautanen Qt Group is well positioned for growth, as many industries are on the brink of technological transitions. In our view, it is still a +358 50 3460 321 good time to jump on board the growth story as market trends continue to gain momentum, Qt’s investments are proven [email protected] and bearing fruit, but still the market has somewhat neglected the company as it is still burdened by earnings’ in the red due to the growth investments. The digital society is being built using tools by Qt Qt develops, productizes, and licenses software development tools based on Qt technology by means of open sourced and commercialized licenses. The company’s products are used to develop applications for embedded devices as well as graphic user interfaces for desktop, mobile, and embedded devices. An increasing amount of Qt’s customers’ industries are facing a turning point. The value creation for their products is transitioning from the device to software and services, which is why the customers are in need of knowhow and tools to develop graphic interfaces. The Qt cross-platform development Recommendation and target price framework as a technology enables this transition. The business model is highly scalable. It is based on licenses sold to developers, and distribution licenses, where the income is based on sales volumes of the end devices that use Qt Buy technology. Previous: Buy Lack of developers and graphic user interfaces gaining popularity drive market growth 10.0 EUR Many of the industries in which Qt Group’s customers operate are at the verge of making long term choices on technology, Previous : 10.0 and they are searching for a competitive edge and differentiating factors by introducing software and digital services as part of their products. This means that graphic user interfaces will continue to gain popularity in embedded devices, for which Qt Share price : 8.3 EUR offers the development tools required. The software industry is also in constant need of more efficient and powerful tools, Potential 20.5 % as the demand for software developer’s exceeds supply. In the embedded devices’ market, the competitive field is still largely open and fragmented, which is why Qt Group is well positioned to take advantage of these amplifying market trends. According to a user survey conducted by Forrester and user interviews conducted by Inderes, the Qt framework is a strong choice for technology in especially embedded devices, which is still a very early stage growth market. Key figures Strategy has thus far progressed as planned 2017 2018e 2019e 2020e Revenue 36 46 57 74 The current form of Qt Group was born in 2012, when Digia acquired the technology from Nokia for 4 MEUR. Thereafter, as Growth-% 12 % 27 % 25 % 29 % an independent business, Qt has built a global sales network from essentially scratch, reached 40 MEUR in revenue and has a market cap of 210 MEUR. The company is targeting 100 MEUR in revenue for 2021, and an operating profit margin of EBIT adj. -3,2 -2,1 1,1 11,0 over 15%. Our confidence in the validity of these targets is supported by the fact that the strategy thus far has progressed EBIT-% adj. -8,8 % -4,5 % 2,0 % 14,9 % exactly as planned. Correspondingly, the growth strategy risks have been alleviated by the proven successful construction Ne Income -3,2 -2,2 0,8 9,9 of the global sales organization, as well as the proven competitive success of the underlying technology, illustrated by EPS (oik.) -0,14 -0,09 0,03 0,40 securing new significant customerships. The sales cycles are however long, and income from distribution licenses (run-time) is recognized only when the customers end product enters the manufacturing phase, so full realization of the potential of the company requires investors to remain patient. P/E (adj.) neg. neg. >100 20,8 Valuation offers upside as Qt Group progresses towards targets Dividend yield -% 0,0 % 0,0 % 0,0 % 1,9 % EV/EBIT (oik.) neg. neg. >100 15,0 We expect Qt Group’s profile to become more and more intriguing as the company enters the scalable development phase next year, and regains profitability. Sales have a long lead time, and the strong new customer acquisition in license sales EV/EBITDA neg. neg. 75,2 13,7 reflects in distribution license and maintenance income over the next few years. We expect revenue to grow by 27 %, 25 %, EV/Sales 3,1 4,1 3,2 2,2 and 30 % in the years 2018-2020. We expect the EBIT margin to be -5 %, 2 %, and 16 % in the same time frame. The share Source: Inderes is priced with a 4.0x EV/Sales multiple (2018e). The current valuation holds a lot of growth expectances, but simultaneously offers strong returns, providing the targets set in the strategy period are met (100 MEUR revenue in 2021). Source: Inderes Share price development Revenue and EBIT Growth-% and EV/Sales 14,9 % 9,5 29% 2,0 % 27% 25% % 9,0 - -5,4 % -4,5 % 20% -8,8 % 8,5 growth 12% Revenue EBIT 8,0 7,5 7,0 73,6 4x 6,5 4x 57,3 3x 3x 6,0 45,9 36,3 2x 5,5 32,4 5,0 Revenue 1/18 Valuation multiples Valuation Qt OMXHCAP 2016 2017 2018e 2019e 2020e 2016 2017 2018e 2019e 2020e Source: Thomson Reuters Value drivers Risk factors Valuation • Mature and competitive • Failure in investments into sales • Strong sales growth supports product and technology valuation on short term 197 188 • Poor visibility into distribution • Markets have strong growth licenses’ income • Distribution licenses have strong drivers scalable potential • Longevity of competitive edge as • Competitive field is still open in competing technologies emerge • Earnings in the black and embedded devices and develop improving profitability offer support starting in 2019-2020 • Distribution licenses have • Weakening of the Qt developer scalable potential community • Potential acquisition target 3,2 15x • Strategic value of the technology • The growth strategy has progressed according to plan Source: Inderes 3 Table on contents Company description and business model 5-11 Investor profile 12-14 Industry 15-20 Competition 21-23 Strategy 24-26 Historical development 27-28 Estimates and valuation 29-31 Tables 32-37 Disclaimer and recommendation history 38 4 Qt Group in short Qt develops, commercializes, and licenses software development tools based on the Qt technology. The company has both commercial as well as open- Qt Group’s source based licenses. valuation IPO Mcap M&A M&A Spin-off Mcap 2012 100 M€ 50 M€ 100 M€ 4 M€ 90 M€ 200 M€ Digia acquires Qt from Nokia • Independent Qt Group, 2016 share issue and investments into Spin-off from Digia commercialization of the • Trolltech, focus in technology product development 36 MEUR (+12 % vs. 2016) • Digia acquires Qt, 2017 Revenue focus in • Nokia acquired Qt, focus commercialization 50 in product development, and scaling outside -3 MEUR (-9 % of revenue) developer communities, mobile markets 2017 Operating profit and Nokia smart device 40 strategy 12 Countries with operating locations 30 296 Revenue MEUR Revenue 20 Personnel at 2018 Q3 64% / 36% 10 License/ services and maintenance revenue in 2017 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e Source: Qt Group / Inderes 5 Company description and business model 1/4 Company description speed and efficiency are the product’s leading Revenue distribution (2017) competitive advantages. Software development tools independent from platforms Qt’s customer base is very diverse. Qt framework software is in use in over 70 industries, and according to The Qt company offers software developers with a the company, has a userbase of over one million users. 36 % software development environment, which is not The company has operating locations in Finland, Norway, burdened by platform constraints. Qt is a cross-platform Germany, the US, Russia, China, Japan, and Korea. At the application framework and widget toolkit for creating end of Q3’18, Qt employed 296 people, of whom most 64 % interfaces and applications that run natively. These tools work in product development, sales, and consulting. enable the customers’ software developers to improve their efficiency, and helps them launch their products Revenue breakdown LicencesLisenssimyynti and consulting ja konsultointi YlläpitotuototMaintenance faster. Qt is aimed at both visual design, as well as Qt’s revenue in 2017 was 36 MEUR, with YoY growth of coding. The end users are software developers, who 12%, whilst in 2018 comparable revenue has increased by develop user interfaces, or service designers. 32% during the first three quarters. Through growth in Consumers can see the technology implemented in for license sales and increased sales’ exertions, the instance LG’s television interfaces, or the interfaces of company is looking to break the 100 MEUR revenue 42 % new cars’ multimedia systems. Touchscreen based user barrier in 2021. Qt seeks to grow substantially in the interfaces’ increasing demand is one of the megatrends embedded devices’ market, whilst growth in desktop and 58 % driving demand for Qt. By utilizing the technology, it is mobile applications is expected to remain steady. possible to develop applications for embedded devices, workstations, and mobile applications. Out of last year’s revenue, 64% derived from license sales and consulting, with the remaining 36% coming Due to Qt’s development environment, customers can from support and maintenance. North America Pohjois-AmerikkaNorth America RestMuu of maailma the world typically accrue saving in R&D, as they are often typically accounted for 42% of sales, and the rest of the world for in a situation which requires a variety of complicated 58%.