Amid challenging public market conditions, Toronto-based investor relations software company Q4 Inc. has seen its revenue growth decelerate in recent quarters.
Rising inflation, interest rates, and geopolitical tensions have contributed to a broader market downturn this year. These conditions have battered tech valuations, made it tougher to secure capital, and led companies to shift away from growth at all costs, preserve cash, and speed up their path to profitability. In the public markets, these headwinds have fuelled an increase in merger and acquisition (M&A) activity, privatizations, and a dearth of initial public offerings (IPOs).
“Combined, these initiatives position us well to achieve our profitable growth targets in 2023.”
-Darrell Heaps, Q4 Inc.
For Q4 Inc, which caters to public companies, this environment has made it tougher for the firm to retain and add customers.
Since the first quarter of 2021, Q4 Inc. has seen its revenue growth slow. The company, which has historically increased its revenue by around 30 percent quarterly, is now forecasting growth of about half that.
In its third quarter, Q4 Inc. generated revenue of $14.2 million USD, according to the company’s latest financial results. This total represents an 11.2 percent rise year-over-year and a slight drop compared to the 11.5 percent revenue increase Q4 Inc. saw in Q2. The company also posted a net loss of $11.9 million, or $0.30 per share. As of September 30, Q4 Inc. has $60 million available in cash, cash equivalents, short-term investments, and an untapped revolving credit facility.
“Revenue growth from the past two quarters was primarily impacted by macro headwinds, with IPO markets dropping to record lows, limiting our ability to add new customers at the rate we previously had,” Q4 Inc. founder and CEO Darrell Heaps told BetaKit.
In light of these conditions, Q4 Inc. pulled back its spending during the third quarter on areas of its business that are not producing immediate returns, laying off staff and adjusting its sales strategy to focus more of its efforts on selling into its existing customer base. Q4 Inc. has also increased its pricing in recent months to absorb the cost of inflation.
Q4 Inc, which has previously outlined plans to pursue M&A as a pathway to growth, also walked away from an acquisition in the late stages during Q3. Heaps said during the company’s earnings call that while Q4 Inc. remains “opportunistic” on this front, Q4 Inc’s primary focus right now is on organic growth. Given the state of the market and Q4 Inc’s current focus on achieving profitability, Heaps said the bar for any acquisitions made by the firm has risen, and any prospective deals would need to be “highly accretive.”
During the call, Heaps expressed confidence that with these moves, even if broader economic conditions do not improve next year, Q4 Inc. will become cash flow positive and profitable on an earnings before income, taxes, depreciation, and amortization (EBITDA) basis by the second half of 2023.
RELATED: Q4 Inc. lays off eight percent of staff to accelerate path to profitability
“The actions completed this quarter, to reduce costs and improve sales efficiency, will begin to materialize in the coming quarter’s results and drive long-term improvements in operating leverage and gross margin expansion,” Heaps told BetaKit. “Combined, these initiatives position us well to achieve our profitable growth targets in 2023.”
In August, Q4 Inc. laid off 48 employees, eight percent of its staff to “right-size” its sales and marketing and research and development (R&D) efforts.
The company also cut an additional 23 North America-based staff members in late September, and told another 16 their jobs would be made redundant by the end of the year, according to The Logic. Q4 Inc. plans to relocate these roles to Latin America, where the firm established an office in Mexico during Q3.
As Q4 Inc’s restructuring occurred late during Q3, these changes were not reflected in the firm’s latest financial results. CFO and COO Donna De Winter expects to see the cost reductions and efficiency gains associated with them to be fully realized in future quarters, and anticipates they will reduce Q4 Inc’s operating expenses by $9 million annually. De Winter expects the firm’s R&D efforts to benefit from its Latin American expansion.
The also company shifted its sales strategy towards a bundled approach, and according to De Winter, that has helped Q4 Inc. deliver a higher return at lower cost. Heaps noted that September was the firm’s strongest sales month to date.
RELATED: Q4 Inc. CEO downplays IPO concerns after going public, sets sights on M&A to fuel growth
Speaking to the firm’s layoffs and shift in sales strategy in August, Heaps told BetaKit, “when we look at the future of the market, the future of the business, what we have to assume is that it’s going to be a long period for the market to get back to growth mode.”
“Uncontrollable churn tied to M&A in the public markets, along with withdrawn IPOs and delistings, continue to impact retention and the growth of our customer base,” De Winter said during the company’s Q3 earnings call. “This trend continued from Q1 and Q2, and remains elevated due to overall macro conditions.”
While it has been tougher for Q4 Inc. to add new clients during this period, De Winter said Q4 Inc. saw “strong controllable logo retention” in Q3 at 96 percent. The company added 67 customers during the quarter and sold additional products to 96 existing clients, concluding the third quarter with 2,679 total customers—up from 2,600 at the same time in 2021.
“If we see market conditions improve, that’s only going to be a tailwind.”
-Darrell Heaps, Q4 Inc.
Q4 Inc, which trades on the Toronto Stock Exchange (TSX) as ‘QFOR,’ offers a capital markets communications platform. Through its software, which boasts a list of clients that includes Netflix, Walmart, and Nike, Q4 Inc. aims to help public companies better understand their performance and engage with investors. Q4 Inc’s platform facilitates webcasts and earnings calls, organizes financial statements, and provides data analysis.
Q4 Inc.’s more limited growth this year comes after the firm saw significant growth during COVID-19, and went public on the TSX as part of a wave of Canadian tech IPOs. At the time, Q4 Inc. raised $100 million CAD, and its shares began trading in October 2021 at $11.52 apiece, reaching a high of $12 before dropping nearly 75 percent to where it sits today.
As of market close on November 4, Q4 Inc’s stock is trading at $3.05 CAD. The company’s share price has fallen $0.20 since the release of its Q3 earnings report.
Despite all this, De Winter expects that Q4 Inc. will grow its revenue by between 10 to 15 percent over the coming quarters.
“Our expectation through next year is that the [current] market will continue and we won’t see any benefits from from overall market conditions,” said Heaps. “If we see market conditions improve, that’s only going to be a tailwind.”
Feature image courtesy Q4 Inc.