Quindell (LSE: QPP)’s shares have been under pressure all summer and took a further dive to a 52-week low of 136p on Friday 26 September — 80% down from their peak in the spring.
The following Monday, management released a statement saying the Board “notes the recent share price performance and confirms that it knows of no reason for such falls”.
The company added that it will update the market, on or before 15 October, on third-quarter trading and “the continued positive progress being made by the Group in respect of all key performance indicators [KPIs] including cash performance”.
The statement gave the shares a boost, and they’re trading at 177p as I write.
Eyes down for the Q3 numbers
Ahead of Quindell’s half-year results in July, the broker consensus was for full-year revenue of £1,048m. Within the H1 results management gave guidance of £800m-£900m, presumably because it would have been unable to meet its cash flow KPI for the year on higher revenue.
The table below shows quarterly revenue progress over the last four quarters, and my estimates for Q3, Q4 and the full year.
| Q3 2013 | Q4 2013 | Q1 2014 | Q2 2014 | Q3 2014 est. | Q4 2014 est. | FY 2014 est. | |
| Revenue (£m) | 92.1 | 124.7 | c. 159.8 | c. 197.5 | 236.7 | 276.1 | 870.1 |
| Quarter-on-quarter growth | — | +35.4% | +28.1% | +23.6% | +19.8% | +16.6 | — |
As you can see, Quindell’s revenue growth has been declining quite markedly quarter-on-quarter. I’ve applied the Q1-Q2 magnitude of decline to my estimates for Q3 and Q4, which gives full-year revenue of £870m — above the mid-point of the company’s guidance range, but below the current brokers’ consensus of £896m.
Given investors have become accustomed to Quindell reporting results at the top end of, or above, guidance, I think the market would be disappointed if Q3 shows revenue growth decelerating more rapidly than I’ve suggested; in other words, if the company reports Q3 revenue of less than £237m.
EBITDA
After doing adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of £156m in H1 at a margin of 44%, Quindell upped its full-year EBITDA margin guidance to 35%-45% from 35%-40%.
If the company maintained its H1 44% margin on my Q3 revenue estimate, we’d be looking at EBITDA of about £104m. However, somewhat gloomily, one of the company’s house brokers is suggesting a full-year EBITDA margin of not much more than 40%, implying a considerable slip from the H1 margin. Watch out for that if it happens, and for management’s explanation.
Cash flow
Quindell’s cash flow is one of the biggest areas of concern to the market, but the company has set Q3 as a watershed for operating cash flow breakeven (pre exceptional costs, capex, tax and interest). Indeed, management said within its H1 results that the group had already become operating cash flow positive in July.
If the company has nailed Q3 break-even, look for confirmation, or an upping, of previous guidance for a £30-£40m operating cash inflow in H2, and up to £100m in H1 2015.
Raising cash flow guidance could send the shares skywards. However, I think anything less than that would see the sceptical market holding back to dissect the detailed cash flow statement when Quindell releases its full-year results (the company isn’t in the habit of publishing a full cash flow statement within its Q3 releases).