Wednesday, 25 July 2012

Veracap Technology Index Update

At Veracap we track Canadian mid-market public technology companies in an index called the Veracap Technology Index (the “VTI”, see  The VTI includes all technology sector companies trading on the TSX and TSX-V with a market capitalization between $10 million and $500 million.
Recently we examined whether VTI companies generating strong margins were also the highest valued companies in the index and we concluded that largely they were.  In the current issue we focus on growth; are faster growing companies trading at higher LTM EBITDA multiples than average growth companies.  A number of initial observations should be noted as follows: (i) within the VTI more higher growth companies are trading on the TSX-V than the TSX, (ii) many high growth companies are not profitable and, (iii) very few companies have Analyst coverage providing earnings forecasts.  As a result the best valuation comparison metric will be a multiple of LTM revenues.  We looked at average two year historical revenue growth and the following summarizes our findings:

Average 2 year revenue growth
Median LTM revenue multiple
Bottom Quartile
Second Quartile
Third Quartile
Top Quartile
Note: due to the small sample size these findings are not statistically significant.

The average two-year revenue growth rate in the top quartile is an impressive 67.4% per annum which is quite extraordinary and, as expected, this group trades at a substantially higher LTM revenue multiple. It is interesting to see that the middle quartiles are being valued the same and that even declining revenue companies are still trading close to 1x revenues.
Some of the stars in the top quartile include Bluedrop Performance Learning Inc., iSign Media Solutions Inc., Avigilon Corporation, Poynt Corporation, Amaya Gaming Group Inc., and ePals Corporation. Fifty-three percent of the top quartile companies were also profitable and the highest profit margins were generated by C-Com Satellite Systems Inc., Norsat International Inc. and Zedi, Inc.
As expected, high-growth VTI companies are trading at stronger revenue multiples than their moderate growth peers.  While there is insufficient data to draw statistically significant conclusions, the following summarizes some of the parameters we have observed in the VTI as at July 1, 2012:
No. of companies
Avg. Market Cap
$82.3 Million
% profitable
% Growing > 10%

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

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