Investor relations software provider Q4 Inc. has slashed the size and pricing of its initial public offering on the Toronto Stock Exchange after weaker than expected demand from investors.
The company said in a securities filing Friday it has raised $100-million at an offering price of $12 a share, confirming a Globe and Mail report earlier in the day. That’s sharply lower than the $14 to $17.50 range the company had set earlier this month when it revived its IPO, originally slated for this past June, with an intention of raising $150-million. The stock begins trading Monday under the ticker QFOR.
The price does fall within the original $10.50 to $13 range the company had set in June when it first filed to go public, however, the S&P/TSX Composite Index has gained 5 per cent since. At the time, Q4 delayed the offering after one of its business partners, shareholder communications company Broadridge Financial Solutions Corp., served notice during the IPO process that it wanted to renegotiate a contract over a nascent, virtual shareholder-meeting product the companies had developed.
Q4 decided to hold off going public until after the matter was settled; the parties ultimately agreed to terminate the partnership, which accounted for $5-million of Q4′s $17.3-million second-quarter revenue. Q4 subsequently stopped offering the product.
Q4 sells software for managing the investor-relations needs of public companies. Its technology is used for online webcasts and earnings calls, and it organizes financial statements on the investor relations sections of company websites. It provides data intelligence services to companies, analyzing capital flows and capturing information on activist shareholder activities. Its software is used by more than 2,500 clients.
Q4 returned to market two weeks ago, filing an updated prospectus disclosing the end of the Broadridge relationship – and increasing the price range.
One prospective investor who passed on the deal told The Globe they hesitated partly because of the company’s uneven performance on a measure known in the software business as the “Rule of 40.” The Globe is not identifying the source as they are not authorized to speak publicly on the matter.
Investors in the space typically look for companies generating a revenue growth rate plus operating margin that equals 40 or more. For example, a company that grows revenue by 30 per cent year-over-year and has an operating margin of 11 per cent would have a sum of 41, above the 40 threshold. A company growing revenues by 50 per cent with an operating margin of negative 30 per cent would have a sum of 20, below the 40 level.
Q4′s revenue in the first six months increased by 48 per cent and its adjusted operating margin was negative 24.4 per cent, adding up to 23.6 under the Rule-of-40 calculation. Revenue growth plus operating margin was 66 last year, and negative 4.8 in 2019. Projections for 2022 were for Q4 to fall below 40 again, the source said.
Q4 comes to market during a busy fall for Canadian tech IPOs. Three companies – E Automotive Inc., D2L Corp. and Sharethrough Inc. – set price ranges for their TSX IPOs this week, and Propel Holdings Inc. began trading Wednesday. Canada’s senior exchange has seen a record run of new Canadian tech issues: 16 such companies have completed IPOs since July, 2020. That compares with 12 IPOs in the 11 years ended December, 2019.
But their performance has been uneven. The Globe and Mail reported this week the average return for tech sector IPOs in the past year was minus 2.4 per cent, based on when each started trading, while the corresponding average stock market return is 16 per cent. At the same time, many companies now trade well below their issue prices, including telemedicine providers Dialogue Health Technologies Inc. and MindBeacon Holdings Inc., digital media company BBTV Holdings Inc., and farming technology seller Farmers Edge Inc.
Several other Canadian IPOs have struggled this year, including MDA Ltd., and non-tech companies Boat Rocker Media Inc. and ABC Technologies Holdings Inc., which also had to cut their offering sizes and prices.
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