Qt Group Stock: Software for Embedded Devices
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Detectives spend most their time figuring out who didn’t commit a crime by vetting a long list of potential suspects. We spend most our time figuring out what not to write about. Ideas pour in from all directions. Public relations firms are constantly trying to send us “pitches,” as if we need more possible topics. Every new disruptive tech company that goes public using a special purpose acquisition company or traditional IPO needs to be vetted. And then there are the names our readers send us.
We refer to Nanalyze as an international community of investors because that’s exactly what it is. Many interesting foreign tech stocks are brought to our attention by readers. In fact, we’re holding several stocks in our tech stock portfolio that were raised by subscribers. That’s why we’re going to continue highlighting interesting foreign stocks that may not make it into our portfolio but might still be interesting to our audience. One such company that numerous Finns have brought to our attention is Qt Group (QTCOM.HE).
About Qt Group
Developed by two Norwegian software engineers, the Qt (pronounced “cute”) software development framework first became publicly available in May 1995. Since then, it’s been passed around more than a cocktail waitress on an oil rig. The core technology was nurtured at Nokia for a while before being sold to a large Finnish software firm before finally becoming a publicly traded company in 2016. As the name implies, Qt Group’s core competency is Qt – a cross-platform development framework for embedded systems which has growth drivers relating to disruptive tech themes such as IoT, industrial automation, and medical devices such as handheld ultrasounds.
The first question we have surrounds total addressable market (TAM) so we can understand how big the opportunity is. Unfortunately, the company’s website is woefully out of date.
In 2014, the market for development tools for embedded systems was valued at approximately one billion US dollars, of which around a quarter is potential market for Qt.
That seems quite small. Some cursory Google searches show an embedded devices software market that’s much larger – $13.5 billion in 2020 growing to $21.5 billion by 2027, for example. That estimate comes from a report by Global Market Insights that includes the following growth drivers for embedded device software:
- Growing adoption of AI and machine learning in embedded software
- Increasing demand for embedded OS in the automotive sector
- Growing trend towards industrial automation and IIoT in developing nations
- Surge in demand for embedded software in consumer electronics
- Increasing deployment of embedded software in smartphones
Qt Group’s lack of information for investors is something we see quite often from tech companies that are too busy kicking ass and taking names to care much about how they’re perceived by people not in the know. People who are in the know include the 1.5 million developers around the world who use Qt’s platform to develop cross-platform apps. While there’s an opensource version of the platform, you’ll need to pay if you want to commercialize a product on it. And plenty of developers are willing to pay.
Revenues for Qt have been growing strong since they began trading on the Helsinki Stock Exchange in 2016 and the company forecasts between 30 to 40 percent revenue growth for 2022. They’re also looking externally for growth with the establishment of a “Ventures” business unit to explore new business opportunities. In 2021, Qt acquired a profitable German software test automation firm called froglogic
The company talks about targeting the automotive industry, consumer electronics, medical devices, and industrial automation sectors. What they don’t provide investors is color on how current revenues are broken down across these sectors. Based on their licensing model and the number of developers using their platform, we can probably assume they don’t have a single customer accounting for more than 10% of revenues, but we’d like to hear it from the horse’s mouth. The only revenue segmentation we’re provided can be found in the annual report as seen below.
The “Maintenance revenue” category reflects revenues that are “recognized evenly over the contract period” which describes something more akin to a software-as-a–service (SaaS) business model. The remainder of revenues are licenses that are paid as you go along and consulting. In their Q4-2021 results presentation, they provide the proportion of license revenues (21%) versus consulting (79%).
If the Finns use the word “consulting” in the same manner as we do, then this is a concern. It’s awfully easy to scale a SaaS offering, but not so easy to scale a services offering performed by humans. After reading through all their year-end collateral, we’re left with more questions than answers.
A SWOT Analysis
MBAs who can’t make it in investment banking often choose the next best thing – management consulting – where they can then draw frameworks on whiteboards to try and justify the exorbitant fees they’re charging the poor soul that has to listen to them. One useful framework to use for Qt Group is strengths, weaknesses, opportunities, and threats (SWOT). We’re pretty sure the opportunity is there, but we can’t assess threats without knowing about the competition. The first place we look for competitor lists is a Gartner Magic Quadrant or Forrester Wave diagram, neither of which we can find relating to embedded software. Knowing who Qt has to compete with and how much market share has been captured would be exceptionally useful information. All we were able to find was a “commissioned report” produced in 2019 by an analyst who seems quite objective. While rather verbose, the report contained the below competitive analysis for QT:
The analyst report states that “Qt’s platform independence and C++ -programming language derived
speed and efficiency are the product’s leading competitive advantages.” At that time, Qt Group was believed to be targeting two main areas of growth – automotive and industrial automation – and was said to be facing long sales cycles with 13 of the 15 top automakers in proof-of-concept stage. Today, we have no idea what success Qt Group has had in their target industry verticals because the company doesn’t tell us.
A commissioned report by Forrester talks about how the Qt software development platform offers clients two notable advantages – they can deploy across multiple platforms using a smaller number of developers (cost savings) and go to market quicker (time savings). Anyone who develops software knows about the three-legged stool – time, money, and functionality. Mess with one and the other two suffer (just watch out for the mythical man month). Qt can help save time and cost and now they’re throwing in software test automation to boot. If you’re thinking about developing a cross-platform application, this sounds like a vendor you’d want to see a demo from.
Buying QT Group Stock
Researching foreign stocks is always a challenge because sporadic information frameworks mean there’s not only missing data but new data. For QT Group, they tell us that of their 26,982 shareholders, around 96% represent “households” which essentially means retail investors. Foreign retail investors often use under-the-radar investment forums to discuss stocks like this, so there are probably plenty of bulls out there who can fill in the gaps. If QT spent a nominal amount of time sprucing up their value proposition and missing metrics, it might make for a compelling pick-and-shovel investment on a variety of disruptive tech themes. Until then, we don’t have a sufficient understanding of what we’re getting ourselves into with an investment in QT Group. Existing investors should press the company to be better describe where revenues are coming from and provide investors with more metrics that can be used to decipher the health of the business.
Conclusion
We’ve always found foreign traded disruptive tech stocks appealing because they help us avoid domestic bias while providing some foreign currency diversification. The downside is that there is little consistency in how companies choose what metrics should be made available for investors. Qt Group is a company that sounds good on paper, but doesn’t provide us with enough information to make an informed investment decision.
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QT revenue consists of development license selling (now subscription model) and Distribution licenses (royalty per device or for example per screen in the car). And also revenue comes from consulting but it is not big part of the story. If I remember correctly, QT expects the distribution licenses to be roughly 30% of the sales in the future. It is very high margin sales (close to 100%) so the total margin levels what the company can achieve can be very high.
More info can be found over here if you want to use translate:
https://keskustelut.inderes.fi/t/qt-group-eeppinen-matka-teknojatiksi/274
Thank you very much for taking the time to comment and point us to more info! Unfortunately, consulting is a very large part of their overall revenues (65% in 2021) and that’s a concern for us. Regarding translating information, we’ve tried that before and it’s just really ineffective and error-prone. If the company wants to attract more international investors they’ll need more transparency on where revenues are coming from.
Thank you for your reply. The QT expects the consultation revenue to stay below 20% from the total revenue of licenses & consultation. I don’t remember the exact source but it can be also found from the Inderes Analysis (in finnish).
At no point has Qt mentioned that their license revenue is 21% and consulting is 79%. This is clearly a misunderstanding on Nalyzes part and you should investigate where you have retrieved that number. Based on the EBIT growth and move from term and perpetual licenses to subscription model (as mentioned in the Q4 ’21 webcast), where revenues are moving from maintenance to licensing (as the revenue recognition principles are different between these), one could estimate that actually license revenue is the largest part of their revenues and largest contributor to revenue growth.
We don’t just make stuff up. It’s in their annual report. If you want us to send you the information we’re happy to.
The actual table taken from the presentation – from the horse’s mouth – has been added to the article.
Thanks for the further clarification. It is indeed a misunderstanding on Nanalyzes part. The “Distribution Licenses” are what Qt’s accounts pay them on a sold-device basis. I.e., if a car manufacturer puts a screen with Qt technology in their vehicle => they pay 50cnt’s to Qt as royalty per each device. I.e. it is a royalty payment.
Qt reports these on a yearly basis only (not on quarterly basis). This means out of FY2021 “License sales and consulting” 100MEUR, distribution licenses were 21MEUR. And then 79MEUR are regular license and consulting revenue.
And out of this 79MEUR, based on my above deduction, I would estimate that largest chunk is license revenue and consulting is not their major business.
I don’t know what kind of a niche website this nanalyze.com is but your arrogant sounding response is quite telling.
Yes, there is a misunderstanding, but perhaps it would also be good to give some thought to why misunderstandings like this are possible in the first place, namely poor reporting practices. Their whole licensing model is quite chaotic and it is no wonder it does not open up to everyone, not even to the analysts. Unfortunately, this is the case for many of the customers as well. You can start by reading some of their blog comments on simplifying their licensing. Some food for your thought: if it were in the interest of the company to separate the consulting revenues from those coming from developer and distribution licenses, why haven’t they done so already? Too niche to give the investors this piece of information?
Probably for the same reason their website still offers up TAM estimates from 2014. It’s not the job of analysts to use forensic accounting to figure out what a firm does. Yes, they’re busy executing, but we’re simply reporting on the information they make available in their annual report and earnings deck – like we do with all firms. What matters to investors should be found in those documents. We added a table to the article which shows the allocation of consulting vs. licenses.
Some more food for thought from other finnish guy to finnish guy. I actually contacted Qt about their reporting practices (like adviced in article also) and they replyed to me saying that yes, they are sorry for poor reporting for international audience. So they take the responsibility of bad reporting. This is no reason to blame analysts.
For me it is not arrogant to be direct and deliver the info you are given. Like Trolltech says: “Some food for your thought: if it were in the interest of the company to separate the consulting revenues from those coming from developer and distribution licenses, why haven’t they done so already? Too niche to give the investors this piece of information?”