Quartix talks up 'resilience' to Covid crisis

Subscription-based vehicle tracking provider Quartix Holdings updated the market on its trading on Monday, reporting that the first quarter ended 31 March was “strong”, and consistent with meeting market expectations for the year.

The AIM-traded firm said growth in new installations was “particularly strong” in the first two months of the year, but slowed considerably during March, with the effect most marked in the UK.

Total new installations for the group during the first quarter grew 11% to 11,744, while new installations in the UK reduced 2% to 6,409.

In France, they grew by 19% to 2,231, and in the United States they were up 11% to 2,403, while new territories, including Italy, Spain, Poland and Germany, accounted for 701 installations.

Since the start of April, the company said it had seen a “large slowdown” in orders in all regions, most notably in the UK, where some orders initially expected to be installed in March had been postponed indefinitely.

“Several significant orders have, however, been won in March and April and there continues to be a significant level of activity with larger prospects,” the board said in its statement.

“Despite this the impact of coronavirus on our broader target market - particularly in the small to medium enterprise sector - is likely to result in orders for new installation in April being at least 60% lower than for the same period in 2019.”

Looking at its insurance telematics operations, Quartix said that following the introduction of the lockdown arrangements in the UK on 23 March, it experienced an 80% reduction in installation capacity as many sub-contractors decided to stay at home.

Underwriters thus took the decision to stop writing new business for installed telematics products, and installations in April were expected to be around 700 units.

Installation capacity had since increased to about 75% of normal levels, however, and some insurance business was expected to restart in May, but at a “modest” level.

The company said it had defined new health and safety-related guidance for its installers to adhere to, and had been able to provide them with masks and gloves, which were sourced through its manufacturing partner in China.

Additional personal protective equipment (PPE), which the company was able to source in that way, had also been donated to NHS and other care organisations local to the company's offices.

“As previously announced, Quartix took very early action to move to remote working to protect its employees and is pleased to note that this is working efficiently,” the board said of the impact of the Covid-19 coronavirus pandemic.

“The board's recommendation that shareholders reject the resolution for the payment of a dividend at the annual general meeting was supported, and the company therefore has continued to build its cash reserves.”

It said net cash as at 31 March was £8.5m.

“The company's revenue is underpinned by its subscription base of more than 150,000 commercial vehicles, meaning a significant proportion of group sales are recurring revenues.

“In each case the value of the subscription paid to Quartix is a tiny fraction of the overall cost to the customer of the vehicle, manpower and associated overheads.

“The initial impact of the Covid-19 pandemic on the company's profitability has therefore been very limited, given the recurring nature of these subscriptions.”

That, Quartix said, was likely to continue to be the case for several months.

Although there had been a “slight increase” in attrition rates and direct debit failures, coupled with some loss of revenue from the insurance sector, those effects were currently being overcome by the reduction in costs associated with the installation of new tracking systems, which the firm said were normally expensed in the month of installation.

“The board therefore believes that the Covid-19 pandemic is unlikely to have a material impact on profit and cash flow in the first half of 2020, although there is likely to be some reduction in revenue compared to its previous expectations.

“Given the extreme uncertainty regarding the economic impact of the pandemic, the board is unable to provide guidance with regard to expected financial performance in the second half of 2020 or for 2021.”

It said it had, however, concluded a financial risk assessment to measure the potential impact of the pandemic on its business in the second half of 2020 and 2021.

That was considered by the board to be a “pessimistic outlook”, and was used for planning purposes.

Under that scenario, the board said it had assumed levels of new fleet installations would remain “significantly below” those of 2019 or the first quarter of 2020 until the end of September.

After an initial improvement, the board said it had then assumed a “gradual but slow” recovery in the market, which could take 18 months or more.

Some small-to-medium enterprise customers would not have the cash reserves or ability to continue trading through to the end of the year.

“This, in turn, is assumed to lead to attrition rates rising to 30% on an annualised basis by year end, and then moderating to a level of approximately 20% in 2021.

“Under such a scenario, customer debt defaults would be expected to rise significantly and price erosion would also be expected to increase.”

Quartix said it would likely continue to invest in marketing, sales and product development throughout the period, with the goal of returning to 2019 levels of new installations during the latter half of 2021.

“On the basis of the above scenario, the company believes that it is unlikely that it will need to draw upon the substantial cash reserves it has on the balance sheet, demonstrating [its] resilience even in the current unique economic circumstances,” the board said.

“Nonetheless it intends maintaining its cash balances at least at current levels for contingency purposes unless it becomes apparent that this is no longer necessary.”

It said it was “clearly possible” that a more optimistic scenario could occur, if, for example, an effective vaccine or treatment for Covid-19 became universally available within the next 12 months, or the measures taken by government led to a more rapid recovery from the impact of the pandemic on customers.

“In such circumstances, the company's performance would be less impacted than in the case of the scenario the board has based its plans upon.

“Quartix will provide a further update for shareholders at the end of May.”

At 1102 BST, shares in Quartix Holdings were down 0.79% at 250p.