Recurring revenue, the holy grail. That sweet sweet predictable income stream. The idea got taken to the extreme the past 18 months but now it is time to come back to fundamentals.
 
Too many names were driving hardware sales growth at 0 to even negative gross margin to drive immaterial growth in ancillary service revenue. In a raging bull market people are will to look past it but at the end of the day its about generating a return on that revenue.
 
I always come back to two names. One is old faithful for me in supply chain logistics/telematics and another one that is a newer one for me that has now right sized and focused it business selling off non-core assets addressing on the security space.  
 
Down market cap you are not going to find many if any pure rule of 40 names (ARR growth + Cash Operating Margin => 40%) but there are a couple of companies that are pushing close.
 
I think its key to focus on the names that target the B2B side as there is far less churn, customer acquisition costs and price sensitivity than the more B2C offerings. That is partially the fact why I had to sell the once loved BeWhere Holdings as I disagree with their B2C pivot with their mini offering.
 
Some of these have gotten really cheap and they just keep chugging along especially on the growth side.  
 
Let’s Dig In;
 
 
AirIQ Inc. – IQ.V
 
$2.15M Cash on the Balance Sheet no debt

Enterprise Value – $6M

TTM Annual Recurring Revenue – $3.4M

TTM Annual Recurring Revenue Growth – 8%

TTM Cash Operating Margin – 22%

ARR Growth + Cash Operating Margin – 30%
 
 
It is right there, but such a steady grower. With heavy US exposure with the USD/CAD moving back down to 52WH Lows should see a tick higher in these growth metrics in the next couple of Qs pick up a bit.
 
This is the value play of the two and I just keep adding to it every time there are shares on the offer <0.30/share.
 
 
On Valuation – 1.75x ARR & 6.5x Cash EPS
 
Buy it and tuck it away, this business is worth at least 4x ARR or 15x Cash EPS gets you a double.
 
 
 
Zedcor Inc.
 
Cash Raised at 0.50/share & Debt Refi’d

Market Cap – $26M

Q1 Run-Rate Annual Recurring Revenue – $18.5M

Q1 Annual Recurring Revenue Growth – 73%

Q1 Cash Operating Margin – 21%

ARR Growth + Cash Operating Margin – 94%
 
 
Ever since they sold off the oil equipment business and focused on the security business the core security business has taken off. Hard to know how much of the business is truly recurring versus more contract based but given the cash gross margin it has very good unit economics.
 
50%+ Cash Gross Margins & 20% Cash Operating Margins can take you a long long way.
 
They have been able to recapitalize the balance sheet to fund growth without too much dilution and manage the supply chain issues very effectively.
 
Also, very interesting play on Western Canada renaissance with the move in commodity prices.
 
This is the growth play of the two and another one that is very under the radar. They have been able to grow the revenue base by over 200% since 2020 with no signs of slowing down.
 
 
On Valuation – If the majority of the revenue is recurring it is crazy cheap at 1.4x ARR and 5x EBITDA for a business that is growing 50%+ YoY
 
If they can prove they can keep this growth trajectory going they could see the multiple really re-rate here much higher if they keep that growth going within balance sheet capacity because that capital markets might not be open for a while down market cap.  
 
 
In Conclusion, whether it be a slow grower that is highly profitable with balance sheet surplus or the fast grower that is funneling all its cashflow back into the business. Both businesses are highly under the radar and two of the best B2B ARR models on the TSXV.
 
 
LONG