Quadrant 4 Systems: A Growth Opportunity In The Cloud Sector

Dec.26.13 | About: Quadrant 4 (QFOR)

Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

2013 was a year that was dominated by cloud investing and IPOs. Cloud companies hit record highs in tech, initial public offerings in numbers and performance. Cloud computing is fueling the growth of scores of startups that are challenging software giants like Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL), IBM (NYSE:IBM), SAP (NYSE:SAP) and others that have been slow to adopt to the platform. Companies with business models steeped in cloud-based computing accounted for the biggest share -- 15 of 40, or 37.5% of all tech-related initial public offerings in the 12 months that ended on Sept. 30. A salient IPO in healthcare cloud sector that doubled on the initial day of its public offering was that of Veeva Systems (NYSE:VEEV). The company's current market cap is $4.2 billion and provides services to clients that include Merck & Co. (NYSE:MRK), Novartis AG (NVS,) and Eli Lilly (NYSE:LLY). At the time of their IPO, Veeva Systems had $18 million in net income. This exemplifies the high multiples on earnings of companies that inhabit the cloud sector.

Quadrant 4 Systems Corporation (OTCPK:QFOR) offers software products, platforms, consulting services and solutions comprising proprietary technologies in social media, mobility analytics and cloud applications to small, medium and large enterprise customers. The company offers its technology solutions to the healthcare, manufacturing, retail, media, entertainment and high tech industries worldwide.

Quadrant 4 Systems, unlike its counterparts in the cloud technology sector that were alluded to above, did not have the luxury of being brought public by the likes of Goldman Sachs (NYSE:GS) or Morgan Stanley (NYSE:MS). Thus, the company did not have the institutional support of its peers in the sector. With that in mind, the company's performance to date is impressive. Through the first nine months of 2013 Quadrant 4 Systems produced $28 million in revenues with gross margins of 26%. This represents a 41% year-over-year increase in revenues and a 5% increase in gross margins, respectively.

Earnings fell marginally during this nine-month period due to the fact that the company completed a merger during that time period. As the company assimilates its acquisitions the shift will be toward organic growth, which should have a positive impact on the company's earnings. Quadrant 4 Systems announced in February 2013 a merger with Momentum Mobile. This merger allows the company to be a potential significant competitor in the mobile development market, which saw revenues exceed $30 billion in 2012.

From an organic growth standpoint, the company announced in October of 2013 that it had released version 2.0 of its healthcare exchange platform (QHIX). This was a propitious announcement for the company given the current back drop for the healthcare industry. Over 150 million Americans are now eligible to enroll in commercial non-government healthcare exchanges. This exchange allows members to choose from among numerous providers while personalizing their own healthcare plans. Quadrant 4 Systems projects that it can enroll up to 5 million new members over the next 48 months. To translate that into numbers: QFOR projects that the new members could generate $10 million in organic revenues for the company, with gross margins similar to a fully deployed SaaS solution.

There is dilution risk associated with owning small-cap equities. One common thread with owning small-cap companies and their large-cap brethren is that the prospects for long-term shareholders are based management's ability to create organic growth. As the company continues to strengthen its balance sheet it should be able to uplist to a superior exchange, which would bode well for long-term shareholders. Given all of the above, the long-term risk vs. reward ratio could play out well for shareholders of Quadrant 4 Systems in 2014.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.