Description

DISCLAIMER 

As of the publication date of this report, the author and its affiliates have a long position in VIQ Solutions (VQS CN). The author and its affiliates stand to realize gains in the event that the price of VIQ’s stock increases. Following publication, the author may transact in the securities of VIQ. All expressions of opinion are subject to change without notice, and the author does not undertake to update this report or any information herein. 

Executive Summary

VIQ Solutions is an under the radar global provider of voice/video capture technology and transcription services on the cusp of a significant acceleration in revenue and earnings power as management continues to execute its roll-up strategy, the economy reopens later this year, and the business automates most of its cost base. Management has a track record of creating value as shares of VQS have compounded at 31% annually since the current CEO took over the reins in Feb 2015, but we believe value creation is still in the early innings. Despite VIQ’s attractive, catalyst-rich opportunity set and management’s track record of success, the market has priced the asset at <7x our FY23 EBITDA and <5x our FY24 EBITDA driven primarily by a lack of investor awareness. This should change imminently following a Nasdaq listing this Summer. Insiders share our bullish view as evidenced by significant insider buying over the last few years and into 2021. We believe a reasonable base case results in over 400% upside over the next 4 years, providing a 47% IRR to investors from current prices. With strong execution, this has 10x+ potential in a bull case.

Main Thesis Points

1. VIQ operates in the highly fragmented, secular growth transcription industry which is ripe for disruption and consolidation. 

1. The transcription industry serves a variety of end markets such as Legal, Government, Medical, and Media through the recording and transcription of source material, often stored within proprietary transcription software on the organization’s behalf. 

2. The transcription market in the US is estimated to grow at 6% per year over the next decade as organizations increasingly strive to analyze as much relevant data as possible. 

1. https://www.grandviewresearch.com/industry-analysis/us-transcription-market#:~:text=The%20U.S.%20transcription%20market%20size%20was%20estimated%20at%20USD%2019.8,USD%2032.7%20billion%20by%202027.

2. Transcripts are rapidly becoming must-have data for key events in various industries VIQ supports such as court hearings, depositions, high profile conferences/events/earnings calls, insurance litigation/testimonies. 

3. Industry growth is further compounded by the global push for increased transparency and accountability particularly within areas of law enforcement and government. 

1. While body cams and court hearing recordings are first steps, these recordings are significantly more useful when the audio can be transcribed accurately and completely. 

4. Court reporters, key competitors for remote legal transcription providers like VIQ, are being phased out of the industry. These are typically elderly women (age 50-70) that have been working this job for most of their careers. While they are more expensive than the outsourced transcription vendors who use technology to enhance efficiency, court tradition has been to have a reporter on sight recording metadata or verbatim transcription. As court reporters retire, courts are moving to their incumbent digital audio/video recording services provider for transcription services or putting out RFPs for transcription vendors. 

1. https://www.themarshallproject.org/2019/02/14/in-court-where-are-siri-and-alexa

5. Despite having attractive secular growth, the industry remains extremely fragmented with no dominant players as many contracts are won and lost at the local level (even VIQ has <0.3% market share based on management’s TAM). 

1. We estimate that there are hundreds of transcription vendors domestically, with the vast majority run by small business owners that have been serving this industry for most of their careers and use little to no technology to assist them in their transcription process. This compares to VIQ that has been developing and refining its technology for the last two decades to optimize manual transcription. 

6. Maintaining relationships is key for vendors, which has prevented larger outside players from breaking into the industry. Therefore, consolidation has had to happen from within. Enter VIQ.
   
   

2. VIQ Solutions is an attractive business model with a winning strategy and excellent management team that is uniquely suited to roll-up the transcription industry.

1. When Sebastien Pare joined VIQ Solutions in 2014 the company was in disarray and priced by the market for bankruptcy after recently losing a major contract. After taking the reins as CEO in 2015, Sebastien quickly pivoted what was an old-school court reporting transcription services company into the diversified, scaling, and tech-driven business VIQ is today through acquisitions and investments in technology. 

2. VIQ Solutions provides end-to-end services to the global transcription market, offering cloud video/audio data storage services and as-needed transcription services for a variety of end markets. VIQ’s cloud solution stores the audio/video recordings of all relevant events (court hearings, depositions, high profile conferences/events/earnings calls, insurance litigation/testimonies) and provides the user interface to retrieve and review files making the solution highly sticky. Once VIQ’s software is in place, VIQ can easily cross-sell its transcription service. VIQ charges monthly fees for its software vertical and charges volume-based fees per line or page for its transcription business. 

1. This all-in-one offering compares to VIQ’s “mom & pop” competitors who are often selling either the equipment, the software, or the transcription services as standalone products and are only using limited amounts of technology to assist their transcriptionists in their workflow.

3. VIQ is a scalable, asset-light business with recurring revenue contracts (typically 5-7 years) that provide significant earnings visibility. Most of VIQ’s COGs are payments to its remote transcriptionists. This business model allows VIQ to grow and onboard new customers with negligible capital investment, and to date, VIQ has not struggled to find employees to support growth. 

4. VIQ has a winning M&A strategy that leads to immediate and sustained value creation.

1. Due to the sticky nature of industry contracts, by buying other transcription companies, VIQ is essentially buying their contracts/relationships while leveraging its superior technology and cost base to optimize profitability and add more value to the end customer. 

2. VIQ’s gross margins are significantly higher than peers while its overhead is proportionally lower due to significant investments made in technology over the years. This leads to very accretive opportunities for acquisitions from relatively unsophisticated sellers. 

3. Management has publicly stated that they expect acquisition synergies to increase target gross margins by 15-20% in the first 18 months of operations and simultaneously reduce target G&A costs by up to 20% in the first 18 months. As seen in the math below, VIQ can buy businesses at ~6x EBITDA pre-synergies and quickly achieve post-integration multiples of ~3.5x.

5. VIQ Solutions today is <0.3% of the $8.6B US transcription industry, yet despite its small size, we believe that VIQ is one of the industry’s larger and most sophisticated players. There is ample opportunity for VIQ Solutions to double its current revenue base many times over through acquisition given the limited competition in the industry today. Below we show the US market size according to VIQ Solutions and have attached a variety of industry competitors we have come across in our research. 

6. VIQ Solutions raised $20M CAD of capital in November 2020 primarily to fund future acquisitions and is currently attempting to expand their credit facility and refinance from a 10% interest rate today to as low as a 6% rate. We expect the first round of significant capital deployments for VIQ to take place by Summer 2021 and expect the market to respond positively. 

7. Sebastien is supported by a heavy-hitting management team with significant experience in M&A that we believe is vastly superior to the “mom & pop” management teams of most competitors.

1. Susan Sumner, VIQ’s COO who joined in 2018, ran Nuance’s ambulatory transcription business very successfully according to former co-workers we have spoken with. She made a number of acquisitions that significantly improved margins and was able to leverage their scale to win incremental contracts for the business. Susan is very involved in sourcing and integrating acquisitions for VIQ.

2. Alexie Edwards, VIQ’s CFO who joined in May 2019, spent 10 years at Jonas Software (a subsidiary of Constellation Software) where he was involved with their acquisition integration process and capital markets dealings. Given his background at Constellation, one of the most successful roll-up stories of all time, we are enthusiastic about his involvement and future contributions to VIQ’s capital markets development.  

3. VIQ has significant “reopening” exposure increasing the likelihood of a beat and raise upgrade cycle beginning in 2H 2021 – just in time for its US listing. 

1. A significant % of VIQ’s revenues are tied to court proceedings which in 2020 have seen their biggest decline in recent memory. This demand has not been lost—it has just been pushed out, creating a significant backlog that will be reflected in VIQ’s earnings power in 2H 2021 and the years to come. 

https://trac.syr.edu/phptools/immigration/court_backlog/

2. Queensland contract 

1. In October of 2020, VIQ Solutions announced that they won a major $30M 6-year contract with the Australian Queensland Courts, providing an all-in-one recording and transcription services solution to the court. 

2. An estimated ~$5M in revenues will be recognized annually starting in July 2021 ($5M = ~15% of VIQ’s current revenue base). This revenue will be incremental and sustainable on top of the organic growth VIQ will see from courts returning to session in 2H 2021/2022.

1. https://viqsolutions.com/media-center/viq-details-queensland-six-year-contract/ 

2. https://viqsolutions.com/media-center/viq-preliminary-q3-2020-results-outlook/ 

3. Below we show the breakdown of our conservative organic revenue growth assumptions that combined with margin expansion and future M&A imply VIQ is trading for <7x FY23 and <5x FY24 EBITDA.

4. In conjunction with a rebound in demand from VIQ’s end markets, VIQ Solutions plans to dual list on the Nasdaq this Summer, and we suspect management will move the listing entirely to the Nasdaq by 2022-2023. 

1. With over 70% of revenues coming from the US today and a large roll-up opportunity in front of the company, management is fully aware of the fact that there is no compelling reason VIQ Solutions should continue to trade in Canada long-term. 

2. VIQ’s management team is focused on maximizing the value of its listing to improve accretion from the significant pipeline of M&A opportunities the company has at its doorstep. This is evidenced by management’s attendance of investor conferences, recent uplist to the TSX, and recent sell-side initiations. The next step in valuation improvement will likely come from management’s intention to dual list VIQ on the Nasdaq by July 1, 2021, which we suspect will be followed by a complete relisting to the Nasdaq by 2022-2023 (eliminating the CAD listing). Both events are likely to result in additional sell-side coverage and greater investor awareness. 

4. VIQ is currently in the process of automating most of its transcription cost base which is likely to significantly reduce COGS and drive organic revenue growth for the foreseeable future. 

1. After years of planning and investment, management will soon be releasing VIQ’s latest technological innovation: “First Draft.” First Draft is a proprietary software solution that can automate transcription of complex multi-speaker environments with 75-80% accuracy, eliminating the need for a transcriptionist in most cases and opening the door to a new type of employee: the “editor” (younger and cheaper than a transcriptionist). 

2. Typical industry compensation for highly labor-intensive transcription services is roughly double that of typical industry compensation for editing services due to the faster speed at which an editor can proofread an AI-transcribed document when compared to manual transcription. VIQ Solutions is currently starting the process of shifting most of its workforce from transcriptionists to editors which will effectively automate >50% of its manual transcription costs (most of COGS). 

3. To date, VIQ Solutions has had to forego industry demand often from its existing customers for higher-volume, lower-priced transcription services since its solution has always required manual interaction and has focused on complex multi-speaker settings. Following the release of First Draft, VIQ Solutions will now be able to offer an entirely automated product to its customer base that will be able to support low-value, high-volume transcription demand while carrying essentially no meaningful costs. This revenue should carry transformative gross margins at 85%+. 

4. Investors can already start to see this shift happening through tracking VIQ’s job posts, with 36/376 jobs today calling for editors instead of transcriptionists (see appendix for more details). We expect this ratio to change to at least a 50%/50% split over time. 

5. This adds another layer of accretion to VIQ’s M&A strategy. Following the integration of First Draft, VIQ can buy subscale transcription companies at ~6x EBITDA (~1.25x sales) and replace its transcriptionists with editors to yield a ~2.5x EBITDA purchase price post synergies. 

6. After the launch of First Draft, if we assume VIQ can funnel 50% of incremental revenues entirely through First Draft and keep the remaining 50% through its standard transcription process, the net result should yield post-integration gross margins of 65%. 

Valuation

We believe that VIQ Solutions (VQS CN) presents an extremely attractive risk/reward in today’s market with largely idiosyncratic upside contingent on management’s ability to deploy capital and successfully commercialize First Draft, with the upcoming catalysts of a Nasdaq dual listing and enhanced investor awareness. In our base case we value VIQ at 15x EBITDA (implies ~4-5x sales longer-term), derived from Nuance’s historical NTM EBITDA multiple (which has since re-rated to 32x NTM EBITDA). ~4-5x sales also represents a significant discount to SaaS-based comparable sales valuation multiples. With conservative assumptions on both growth and margin expansion, we forecast 400% upside by 2025 as the company grows organically, leverages gross margins and overhead, and deploys incrementally higher amounts of capital each year. 

It is prudent to point out that by FY25 in our base case, VIQ is still only 1.5% of its addressable US transcription market. VIQ is a global player and has the potential to see growth accelerate as the company reaches a critical mass. Once VIQ is fully listed on the Nasdaq and First Draft integration is underway, investors may shift their valuation frameworks from profitability measures to revenue measures with the most relevant comps being other Nasdaq-listed SaaS companies trading >10x recurring revenues. This compares to our base case valuation of 15x EBITDA which only implies 4-5x sales. Moreover, it is not crazy to think that a major medical transcription company like Nuance or 3M could buy VIQ for its contracts to expand into more government verticals once VIQ gets on their radars – it wouldn’t be the first time Nuance bought a business run by Susan Sumner (see links below).
While not necessary to win here, we believe there is an upside case where VIQ is a 10x over the next few years through a combination of faster than expected organic and inorganic growth, margin expansion, and multiple re-rating to a SaaS-like valuation.  

https://www.themiddlemarket.com/news/todays-transactions-br-nuance-communications-acquires-accentus 

https://www.modernhealthcare.com/article/20101227/NEWS/312279994/accentus-buys-two-transcription-companies

Risks

1. Execution risk rolling out First Draft 

1. A significant part of the thesis hinges on VIQ’s ability to expand gross margins by integrating First Draft into its workflow and having success offering a higher-volume solution. In the hypothetical scenario where First Draft fails to take group gross margins above 50%, leaving our conservative revenue and opex assumptions unchanged, we believe VIQ solutions is fairly valued today (limiting downside).  

2. Mitigant: 

1. Through LinkedIn investors can monitor the percentage of VIQ jobs being posted for “editors” as opposed to “transcriptionists”. We are already starting to see jobs posted with “editor” descriptions, and we expect to see the ratio of “editor” jobs to “transcriptionist” jobs increase significantly throughout the 2H of 2021 and over the next few years (currently ~10% of total VIQ Solutions job postings). 

2. Insiders have demonstrated high conviction in management’s ability to successfully execute this strategy as evidenced by significant insider buying:

2. Execution risk surrounding capital deployment targets and failing to integrate acquisitions effectively

1. Management has very ambitious capital deployment goals that involve scaling revenues to $50M then to $100M over the next few years. Given these acquisitions are very accretive, there is risk to our target price should management fall significantly short of their revenue goals. 

2. Mitigant:

1. VIQ’s impressive management team has already demonstrated an ability to pay attractive prices for acquisitions, leverage overhead, and improve gross margins, with VIQ earning record EBITDA margins in 2021 despite the covid19-driven industry headwinds.

3. “Back to normal” in the courts takes longer than expected 

1. Should the volume of yearly court sessions never go back to pre-covid levels, there is marginal risk to our organic growth assumptions. 

2. Mitigant:

1. We believe our low double-digit organic growth estimates for VIQ are very conservative considering the following:

1. First Draft will be commercialized over the next few years which should allow VIQ to enter the market of low value/high volume contracts.

2. The backlog for court sessions continues to build.

3. The Australian Queensland contract will add ~$5M in incremental revenues annually starting in July 2021.
   
   

4. Technological risk – why can’t Google/Amazon/Microsoft etc. do this? 

1. Mitigant:

1. Most of VIQ’s multi-year contracts are on the local level – contracts far too small with too much time in-between contracts to generate a meaningful ROI for major tech companies thinking about competing in the industry. 

2. The entirety of VIQ’s business today supports complex multi-speaker transcription and requires significantly more capable AI than what automated Google/Amazon/Microsoft transcription can offer today or in the foreseeable future (otherwise VIQ’s gross margins would already be 85% and not 40%). Given that even First Draft alone cannot support the majority of VIQ’s business (reliant on collaboration with lower-cost editors), we strongly believe that fully automated services for complex multi-speaker environments will not become a reality any time within the foreseeable future. 

Conclusion

VIQ is an idiosyncratic bet on the “automation” and consolidation of the highly complex and fragmented multi-speaker transcription industry, with incremental upside as courts work through their significant backlogs in the coming years and VIQ completes a dual listing on the Nasdaq this Summer. VIQ is undergoing rapid change that will drive significant growth and margin improvement long-term, yet this has yet to be recognized by the market as the business today is trading <7x our 2023 EBITDA and <5x our 2024 EBITDA. At a conservative 15x EBITDA multiple (which implies 4.7x sales at 31% EBITDA margins – well below other SaaS businesses with similar growth and margin profiles), investors can earn a 47% IRR to FY25 and >400% total upside. 

Catalysts

• Dual list on Nasdaq Summer 2021

• Significant M&A by Summer 2021 

• Courts returning to session 2H 2021/2022

• Reopening hype driving multiple expansion 

• US sell-side coverage 

• Full uplist to Nasdaq in 2022-2023

 Legal Disclaimer

∙          The author is an investment adviser to funds that are in the business of buying and selling securities and other financial instruments. This report is provided for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security. An offer or solicitation of an investment in a private fund will only be made to accredited investors pursuant to a private placement memorandum and associated documents.

∙         The author has a long position VIQ Solutions (VQS CN).

∙         The author will profit if the trading price of VQS common stock increases and will lose money if the trading price of common stock of VQS declines.

∙         The author may change its views about or its investment positions in VQS at any time, for any reason or no reason. The author may buy, sell, or otherwise change the form or substance of its VQS investment. The author & affiliates disclaim any obligation to notify the market of any such changes.

∙         The information and opinions expressed in this report are based on publicly available information about VQS. The author recognizes that there may be non-public information in the possession of VQS or others that could lead VQS or others to disagree with our analyses, conclusions, and opinions.

∙         The report includes forward-looking statements, estimates, projections, and opinions on VQS as well as more general conclusions about VQS’s anticipated operating performance. Such statements, estimates, projections, opinions, and conclusions may prove to be substantially inaccurate and are inherently subject to significant risks and uncertainties beyond our control.

∙         Although we believe the report is substantially accurate in all material respects, the author & affiliates make no representation or warranty, express or implied, as to the accuracy or completeness of this report or any other written or oral communication it makes with respect to VQS, and we expressly disclaim any liability relating to the report or such communications (or any inaccuracies or omissions therein). Thus, shareholders and others should conduct their own independent investigation and analysis of the report and of VQS and other companies mentioned.

∙         Except where otherwise indicated, the report speaks as of the date hereof, and we undertake no obligation to correct, update, or revise the report or to otherwise provide any additional materials. The author & affiliates also undertake no commitment to take or refrain from taking any action with respect to VQS or any other company.

Catalyst

See Catalyst section above