Thoughts on the Qlik Technologies (QlikTech) IPO

I spent an hour or so browsing the QlikTech S-1 and thought I’d share some observations.  (See here for my prior post on the company.)

• The company has achieved good scale (2009 revenues of $157M) but growth has been decelerating from 82% in 2007 to 47% in 2008 to 33% in 2009.

• Gross margins are high at 89% due largely to normal margins on license (96%), unusually  high margins on support (96%), normal margins on consulting (27%), and a fairly small consulting business (10% of total revenues) which reduces the pull-down effect on the weighted average.  Wall Street will like this.

• Sales and marketing expense is high at 59% of sales.  Provided switching costs are high, you can argue this is a good investment, and provided growth is high, you can justify it.   I’m going to assume they make some “lost year” arguments about 2009 in their story and will guide to re-accelerated growth, but I’m not sure.  If not, then they will get pressure about the inefficiency of their sales model.

• R&D is spectacularly low at 6% of sales.  There is an argument that if you have a largely completed (cheap and cheerful) BI tool that you should simply go sell the heck out of it and not artificially spend money in R&D when you have neither the vision nor the immediate need to either create new products or investment big money in enhancing your existing one.  I’ve just seen few companies try to make it.  I suspect Wall St. will pressure them to increase this number, regardless of whether it’s the strategically right thing to do for the company.

• Expanded customer base from 1,500 customers in 2005 to over 13,000 in 2009.

• I like their argument that because it’s easier to use than traditional BI tools that it should get greater penetration than the average 28% of potential BI users cited by IDC.

• The unique business model (free downloads and 30-day guarantee post purchase) are consistent with the cheap and cheerful product positioning, which is good.  It does beg the question why sales costs so much, however, if you’re primarily upselling downloaders in a low-commitment fashion.

• I think the claim “analysis tools are not designed for business users” is over-stated.  I can assure you that at BusinessObjects we were designing products for business users.

• I dislike the small piece of huge pie argument, but I suppose that particular fallacy is so embedded in human nature that it will never go away.  I’d rather hear that QlikTech thinks its 2010 potential market is $400M and it wants 50% than hear – as it says in the prospectus -- that they think it’s $8.6B and they presumably want somewhere around 2%.

• They expect 63M shares outstanding after the offering, implying that if they want a $10-$15 share price that they think the company can justify a market cap in the $750M to $1B range.  If it were generating more than a 4% return on sales and growing faster than 33% that would be easier to assume.

• 50% of 2009 license and FYM came from indirect channels.  This again begs the question why sales cost so much; indirect channels are, in theory, more cost-effective than direct.

• They had 124 "dedicated direct sales professionals" as of 12/31/09, which suggests to me that at an average productivity of $1.8M (including all ramping and turnover effects) they could do $223M in revenues in 2010, or growth in the 40% range.  So they seem well teed-up from a sales hiring perspective.

• If my US readers are wondering why you've not heard of them, it's because they were originally founded in Sweden and do 77% of revenues "internationally" (which now means outside the US given that they moved their headquarters in 2004).   This relative lack of US presence should presumably hurt the stock.

• They have a pretty traditional enterprise software business model:  perpetual license and maintenance.  They even state potential demand for SaaS BI as a risk factor.

• They had $35M in deferred revenue on the balance sheet as of 12/31/09.  This strikes me as high; some quick back-of-the-envelope calculations led me to expect ~$25M if it was all the undelivered portion of pre-paid, single-year maintenance contracts.

• Per IDC, 44% of QlikView customers deploy within a month and 77% deploy within three months.  It sounds impressive and is consistent with the small consulting business.  But it also depends on the definition of deploy.

• This is no overnight success story; the company was founded in Sweden in 1993.  There was a six-year product development phase (which perhaps explains the low R&D today) from 1993 to 1999.  From 1999 to 2004 they sold almost exclusively in Europe.  From 2004, they added USA sales and relocated the HQ to Pennsylvania.

• 2009 maintenance renewal rate of 85%

• They intend to increase R&D expenses to increase in both absolute dollars and as a percent of sales going forward.

• 73% of revenues are not dollar denominated.  This means that foreign exchange rates should hit them more (both ways) than for a typical software company.

• This sounds typical:

Our quarterly results reflect seasonality in the sale of our products and services. Historically, a pattern of increased license sales in the fourth quarter has positively impacted sales activity in that period which can make it difficult to  achieve sequential revenue growth in the first quarter. Similarly, our gross margins and operating income have been affected by these historical trends because the majority of our expenses are relatively fixed in the near-term.

• USA revenues grew at 28% in 2009, a bit slower than company overall.  Fairly surprising, given the late USA start and the presumably huge  market opportunity.

• R&D remains in Lund, Sweden with 54 staff as of 12/31/09.

• 574 total employees as of 12/31/09 with 148 in the USA and 426 outside.

• Accel is the biggest shareholder with 26.7% of the stock, pre-offering.

• The proposed ticker symbol is QLIK

• My brain started to melt around page 120.  (Somehow the document set I managed to pull down from the SEC site is about1,000 pages and includes a zillion appendices.  The regular S-1 is here.)

• Click on the image below to blow up their recent financials.