Detailed Response to Gotham City Research Speculation
The Board of Quindell Plc (AIM: QPP.L) rejects the assertions raised in the publication earlier this week by Gotham City Research LLC ("Gotham") and considers the note to be highly defamatory, deliberately misrepresentative and entirely rejects the conclusions that are made. Legal action has already been initiated by the Company against those responsible for this coordinated shorting attack and reports are also being made on their activity to the appropriate regulators. As indicated on 22 April 2014, the Board is now making its detailed response to the key points raised as follows:
QPP's EBITDA margin in 2013
Gotham's perspective: Quindell's margin is anomalous since it is similar to Google and Microsoft and higher than a range of insurance specialist peers, including Exlservice Holdings (19.3%), Genpact (18.1%), Accenture (17.3%), WNS Holdings (15.5%), Guidewire (7.2%), Capita (13.3%), Innovation Group (12.9%), Computer Sciences (11.8%), Xchanging (11.3%) and Serco (5.8%). Although improbable, it's conceivable that Quindell is actually an exceptionally great business, handily outperforming its competitors and earning Google/Microsoft-like profit margins.
Quindell's response: Comparison to Google and Microsoft is irrelevant. However, Quindell is outperforming its competitors and delivering a far higher EBITDA percentage margin than its peers. This is due to the scale of its business (predicted by market analysts to be in excess of £1 billion in revenues in 2014), the bias within its outsourcing to legal services and health services (which are both correspondingly higher margin areas) and the contribution from its technology Solutions Division.
Since a significant proportion of Quindell's outsourcing earnings come from its legal and health services businesses, the best two peers for comparison with the Group's Services Division are a) Slater & Gordon ("S&G") and b) New Law. S&G is a licensed client for certain of Quindell's technology solutions paying on a transactional case-by-case basis. It is one of the world's largest personal injury legal services businesses, listed in Australia. S&G has a number of personal injury business operations in the UK operating under the same regulatory environment as Quindell. S&G recorded an EBITDA margin for 2013 of 24.5%, much higher than the insurance specialist peers that Gotham has highlighted. The New Law group of companies are also a personal injury law firm that handle some associated health services. They were recently acquired by the UK listed company Helphire Group plc. New Law, although much smaller than Quindell's own operations or those of S&G, also have an EBITDA margin of over 24% and again are operating under the same regulatory environment as Quindell.
Neither of these two comparables for the Group's Services Division have the same economies of scale as Quindell, nor the financial advantage of owning its own technology solutions which are being used as the core for Quindell's own outsourcing platform. Furthermore, these competitors are not part of a consolidated business that includes a Solutions Division, which further enhances the overall margins of the Group. It is these factors, which in combination
have enabled Quindell to deliver Adjusted EBITDA margins of 35% in 2013 and 40% in Q1 2014 with guidance that these margins are sustainable in the long term.
Further evidence of this market leading level of performance is demonstrated by the improvement the Group has made in the average number of personal injury claims which are processed through the Ministry of Justice portal by each of Quindell's legal services claims handlers. These non-disputed personal injury claims represent circa 60% of all personal injury claims. When Quindell acquired its core legal services business in 2012, these businesses were running at a rate of circa 180 open cases per fee handler. This is now greater than 360 claims per handler demonstrating a 100% increase in efficiency, with a longer term target of 400 claims per handler. This has been achieved by a combination of: reducing the time to settlement, the use of Quindell's own Challenger process re-engineering techniques, the broader implementation of Quindell technology, improved staff training and the full integration with Quindell's own health services business. This final point of integration within Quindell's own supply chain creates a "waterfall effect" of work from one part of the division to the next, reducing the Group's own cost of acquisition per customer, thereby increasing efficiency, effectiveness and improving margin.
The Group's health services business, which is effectively a technology platform, with a fixed overhead, manages a UK-wide network of physios, doctors, and other supply chain partners. This area has seen a significant reduction in total wage cost for processing each case from circa £73 per case (when revenue was circa £30 million per annum in 2012), to £41 per case in 2013. Of course, this figure is an average across the year which has been reducing as volumes have increased throughout 2013, with further expected improvements due to the implementation of additional Quindell technologies into this area of the business in the first half of 2014. This ensures that as much as possible of the work undertaken leverages the Group's technology platform making the process customer and supply chain partner self service ensuring that Quindell does not have to increase its fixed operating overheads and EBITDA margins increase from volume related operational leverage. We are targeting an average wage cost per case as low as £8 as revenues approach circa £150 million per annum in this area from the second half of 2014. This technology enabled 'platform outsourcing' effect has already seen our gross margins in this health area now reach over 50%.
The benefits to margin of integration and leveraging Quindell's technology within its own operations were discussed at a high level in the 2013 Chairman's Statement and are disclosed in detail in the Group's full year results investor and analyst presentation, available on the Group's website. The relevant slides demonstrating this effect are slides 23 and 25, within appendix 1 - "Supply Chain Waterfall Effect".
Reconciling Quindell's 2013 audited EBITDA of £116.5 million
Gotham's perspective: When adding up the historical reported earnings of the companies Quindell has acquired, Gotham are concerned that they only get to £67.8 million for 2013 and state that they are therefore unable to reconcile circa 42% of Quindell's 2013 EBITDA.
Quindell's response: Many of Gotham's underlying assumptions on post acquisition EBITDA performance by entity during 2013 are inaccurate. Even if this basis were materially accurate, Gotham give no credit for increased claims volumes coming through from contracts won, by the Group leveraging its combined market leading proposition and industry contacts, in 2012 and 2013 in either of the two main operating Divisions. No allowance is made for an
increase in cases generated by the Group's own consumer channel which in fact grew from circa 1,000 cases per month at the point of acquisition to circa 3,500 per month today nor from any increased case work efficiencies in the legal services or health businesses.
Some of the contracts referenced above that were released via RNS in 2012 and 2013 include contracts with major brands such as Direct Line Group, the RAC, and Swinton. These and many others appear to have been ignored by Gotham. Some of the highlights across the two main operating divisions that were released via RNS in 2013 include one of the UK's largest insurance brokers (now named as Swinton), a contract with one of the UK's largest direct insurers for £20 million, one of the UK's largest accident management companies with Quindell revenues now run-rating over £36 million per annum, a three year contract with Honda, a contract with another major UK broker (Endsleigh - a subsidiary of Zurich), technology implementations with Aviva and Ageas (one of the UK's largest insurers with over 8 million policy holders), a key contract with Renault, a five year exclusive telematics and outsourcing contract win with the Independent Broker Association of Ontario (whose members control up to 60% of the distribution of insurance in Ontario), associated telematics initiatives announced with RSA and Gore Mutual, a five year exclusive telematics agreement with CAA (the largest roadside assistance organization in Canada with 1.9 million members with sister organisations across Canada with 5.8 million members), AMA Insurance (another major insurance and roadside assistance brand in Canada).
In addition, near the end of the year, Quindell announced agreements with ten brands of various sizes that in combination represented additional outsourcing revenues, primarily legal and health services related, of circa £150 million per annum. All of this £150 million together with the contracts mentioned above have not been fully recognised in Gotham's analysis, or in fact even mentioned. The Group, in part due to these contracts, has disclosed (slide 22, within appendix 1 of the full year results and investor presentation - "Supply Chain Waterfall Effect") that legal case intake has increased from c.17,500 in Q1 2013 to c.37,000 in Q1 2014 and that cases per employee (i.e. efficiency) has increased as described above. Slide 22 also highlights as case volume reaches 16,000 per month in Q2 2014, the business reaches a revenue run rate of £650 million per annum in legal services with no requirement to sign any new contracts beyond those already announced in 2013 and 2014 to achieve this run rate, this potential is also highlighted in in the Chairman's statement in our preliminary results announcement on 31 March 2014.
This clearly explains that there is no discrepancy as suggested by Gotham. Furthermore it demonstrates the significant organic growth already being achieved by Quindell. This growth highlighted is part of the approaching £1 billion per annum of contracts won in the last 18 months (excluding the revenue from the JV announced with RAC) demonstrating a level of performance that is superior to that of our peer group. The 2013 financial results have been audited by KPMG without qualification. They are included as part of the Group's full listing prospectus as submitted to the UKLA as well as in the Group's preliminary announcement made on 31 March 2014. Gotham's analysis of 2012 EBITDA similarly fails to take account of significant Group led synergistic and organic growth on top of acquired entities.
Compliance with Lord Jackson's reforms (LASPO)
Gotham's perspective: Quindell set up an Alternative Business Structure ("ABS") in order to survive post-Jackson. We question the viability and propriety of this structure, and Quindell's personal injury-related businesses.
Quindell's response: It is clear that Gotham have no real understanding of LASPO or what an ABS is or is used for. They have also been selective in the information provided to deliberately misrepresent and therefore mislead investors on the level of disclosure and transparency that has been provided by Quindell firstly in relation to its ethical stance and transparency of approach to LASPO and also with regards to its margins and financial performance of its individual divisions post LASPO.
What is the purpose of an ABS? Gotham suggest that Quindell set up an ABS in order to survive post the Lord Jackson review, whereas in fact Quindell's purpose of establishing an ABS was to provide a mechanism to allow non-lawyers (including Quindell's shareholders, as owners of a public company) to be able to own and operate a legal business as an extension of its overall claims outsourcing offering. Therefore, clearly this had nothing to do with Quindell's "survival".
Quindell could not even own a law firm until it had established an ABS and had received the appropriate regulatory approvals which included a full review of its business plan, compliance procedures, intended operating model post LASPO and suitability reports on all of its directors as controllers of a legal business by its regulator. More formally, the Law Society's explanation of an ABS is "a regulated organisation which provides legal services and has some form of non-lawyer involvement. This involvement can either be at the management level e.g. as a partner, director or member; or as an owner e.g. an investor or shareholder."
Gotham's perspective: Quindell refuses to explain how its personal injury business complies with Lord Jackson's reforms and referral fee ban. Legal Futures has repeatedly asked Quindell how it complies with the referral fee ban, but it has not returned any calls.
Quindell's response: As highlighted in the answer above the Group's intended operating model post LASPO was reviewed by the regulator before Quindell was even granted an ABS licence. Furthermore, as an SRA regulated entity, Quindell participates in regular relationship management meetings with its SRA supervisory team with the agenda looking across all areas of compliance including in relation to the contractual structures that it has in place with its various business partners. It should be noted that Quindell is the UK's largest and first public company ABS and has therefore undergone a rigorous regulatory approval process through every stage of its formation and every stage has been successfully completed.
Gotham states that "Quindell seems fearful of the consequences that transparency will bring to its personal injury businesses. This would explain why Quindell remains opaque, refusing to provide basic personal injury/legal services financial information. Quindell initiated an "investor teach-in" campaign last year. The company unsurprisingly answers few question in their presentations, as we show...". This is not the case. Gotham were highly selective in the extracts that they presented from the three teach-in presentations (conducted in 2013 to provide full transparent disclosure to all investors).
Out of the three investor days conducted from the content of the presentations that were given to investors only four slides out of the first day's 81 slide presentation were referenced (the Gotham selected slides showed primarily historical financial information of acquired business
prior to their acquisition). The other two day's presentations, comprised of 77 slides and 41 slides, and the remainder of the first day's presentation, contained answers to every one of the Gotham allegations and provided complete transparency on volumes, margins and operating models post LASPO were ignored by Gotham, misrepresenting the situation. These investor day presentations can still all be found in the investor relations section of the Quindell website.
Slides 14-16 of the first investor day presentation (the same presentation which was referenced by Gotham) contained a summary of the company's high level strategy, acquisition criteria and market differentiation of Quindell - how it is focused on stamping down the cost of claims. The following slides (17-20) explained a summary of the Lord Jackson review and its key points and Quindell's unique selling points in insurance to allow it to take advantage of this regulatory change. This allowed Quindell to grow its business in a transparent and ethical model. Slide 21 "How did Quindell become UK no.1 post LASPO?" and slide 22 "Client Driven Contact Model" specifically addressed how, in a client driven contact model where the law firm may also have been written into the policy of the client prior to any accident occurring, a business could operate a transparent and ethical model to provide quality services to the consumer post LASPO and still generate a level of ancillary income for its partners whilst driving down the cost of claims for the industry.
How does this drive down the cost of claims? As Quindell is providing the legal services it can now control and therefore direct associated medical reporting and rehabilitation work into its health services business. The Group's health business typically settles claims 20% below the industry average due to its efficiency and volume purchasing power. Quindell does not only address the legal services aspect of the claim which is key, as the majority of UK personal injury legal claims are non disputed, processed through the Ministry of Justice portal and are therefore fixed price for this aspect (through government regulation post Jackson of the legal fee aspect being fixed at either £500 or £800 dependent on the level of damages awarded to the consumer). This means the cost of the legal fees cannot be reduced or escalated for this type of claim by Quindell or any other organisation. Quindell's approach allows it to also address the additional 17% of the UK motor claims spend which is primarily health and personal injury rehabilitation related at the same time as handling the legal element and thereby drive down the cost of claims for the industry compared to its competitors by circa 20%. It should also be noted that due to its scale this saving is also possible when compared to a number of the major UK insurers' internal operations. This reduction in claims cost can be delivered whilst still making a very respectable EBITDA margin for Quindell shareholders.
Slide 22 of the same presentation specifically quotes the SRA's view on various models and what is covered by the referral fee ban and what isn't. A more transparent and clear explanation could not possibly have been given with regards to how the business complies with the Lord Jackson reforms, the referral fee ban and why Quindell's model is ethical and is demonstrably driving down the cost of claims. This is in total contrast to Gotham's statement that Quindell fails to explain how its personal injury / legal services business complies with the Lord Jackson reforms and referral fee ban.
It should be noted that the same approach as is used by Quindell has latterly been adopted by the vast majority of our competitors (without the benefit of an integrated health business) and also by a number of the UK's major insurers who themselves own law firms in an ABS. Quindell, through its understanding of the market and clearly defined strategy, gained a
significant first mover advantage winning circa £1 billion per annum of business in the last 18 months across all areas of its outsourcing business.
In summary, this model is fully compliant and it has now been discussed with the SRA on a number of occasions, with no issues having been raised by the SRA in relation to this operating model which is now used by the vast majority of the market today. Other variants of this model including marketing agreements and other structures used within a consumer channel, are also used by Quindell. These models are now widely adopted by the market and are understood by the SRA as being models that enable firms to have arrangements that involve the introduction of personal injury work without being in breach of LASPO. Whenever a new operating model is under consideration, as well as discussions with the SRA, at each stage of the various operating model design processes, comprehensive advice is always obtained from leading counsel specialising in the fields of regulatory and professional compliance.
Gotham goes on to state that Legal Futures has repeatedly asked Quindell how it complies with the referral fee ban but has not returned any of Legal Futures' calls. Gotham is confusing investors with the implication that Legal Futures may be some sort of regulator or industry body, whereas in fact it is an industry publication that on one occasion during the week of Quindell's full year results roadshow was unable to talk to Quindell. This lack of communication was only due to the fact that the management team were on an investor roadshow and engaged with a number of other industry publications who were reporting on the success that Quindell had delivered in its 2013 results and its plans for the Group's potential full listing.
Even in Legal Futures' online publication in contrast to Gotham's representation, Legal Futures confirms that there is no suggestion that Quindell is in breach of any regulation: "Legal Futures has repeatedly asked Quindell this week to discuss the report and how it complies with the referral fee ban - although there is no suggestion that it is in breach - but it has not returned any calls".
Quindell has spoken to Legal Futures many times in the past, has been quoted in articles within Legal Futures, and nothing had changed in relation to how the legal services business operates its model post LASPO since the Group's last conversation with Legal Futures. The Group has and will continue to provide total transparency with full details on how it operates as set out above. These are contained in the presentations on the Group's website in relation to prior investor days. Full details on LASPO, Quindell's model post LASPO and its compliance therewith, have also been included in four third-party research reports on the Company (including reports by well respected investment banks) which have provided far more detailed analysis than anything contained within Gotham's misrepresentation.
Gotham's perspective: Quindell refuses to disclose profit margins for its personal injury- related subsidiaries since it acquired them (e.g. Silverbeck Rymer, Ai Claims, Mobile Doctors, Pinto Potts, etc). 20-25% EBITDA margins for its personal injury / legal services- related business seem a stretch. Ai Claims and Mobile Doctors historically reported 4%-6% EBITDA margins. Silverbeck Rymer's 2010 EBITDA margin was 23%, but that's Pre-Jackson reforms.
Quindell's response: Quindell does not refuse to publish its profit margins for its personal injury-related subsidiaries or any other of its outsourcing businesses. In fact, following the
half year results in June 2013, at the third investor and analysts teach-in day which focused on the Services Division, on slide six of that presentation "Quindell Company Overview" the performance of each acquisition completed to that date was compared against any warranted performance targets including its run rate EBITDA at the time of the half year results. These details were fully disclosed, as were the rationale and method used for each acquisition.
Quindell's Services Division is the largest technology enabled claims outsourcing business for the UK P&C insurance industry handling some element of between 25 to 30% of all auto claims, and is the only UK outsourcing organisation ethically addressing the total cost of claims including personal injury and rehabilitation.
At the start of the year prospective customers needed to address the impacts of regulatory change that were coming into force within the UK insurance market on 1 April 2013. This led to accelerated sales cycles and further contract wins throughout the year for the Group's end to end proposition of a complete supply chain offering for personal injury claims, medical reporting, multi disciplined rehabilitation plus auto accident repair including vehicle hire services and other brand extension services. The Group was successful in converting 100% of pilot programs to contract, and the already accelerated sales cycles were also subsequently assisted by new clients taking references from existing clients rather than initiating further pilots.
The revenue and profit run rates of each of the businesses within the Group's Services Division, including legal services, health services and business process services compared to the acquired foundation entities that had helped to establish them were contrasted and the reasons for the significant improvements in achieved or anticipated future performance explained. Also, EBITDA margins for each of these areas were fully disclosed and the means of achieving them discussed. Gotham had access to all of this information, as does every investor, from the Group's website. Gotham did not contact senior management from Quindell to discuss these matters or raise any questions.
At this investor day the run rate revenues highlighted for Quindell Business Process Services (which was initially formed out of the Ai Claims business) were highlighted as £100 million with an EBITDA margin of 7.2% - see slide 21 (Investor and Analyst Presentation Teach-in Day 3). The Group's new and innovative collaboration protocols were launched during the year enabling Quindell and at-fault insurers to work together and for both parties to benefit in the reduction of costs. In the case of collaboration within car hire, benefits include reduced car hire durations, and the offering of initiatives such as cash alternatives to car hire in certain cases. From Quindell's perspective, it also provides the opportunity for continued significant block settlements of debt, as well as a providing a fundamental change to the cash profile of a significant part of the Group's Services Division as insurer debt is settled within up to one month of presentation of an agreed invoice. During the year, meetings were held with most of the major UK insurers, and the Group communicated its expectations that the proportion of take-up of collaboration protocols would ultimately increase to approximately 75% to 80% of the market. Momentum in the pace of adoption of the Model grew throughout the second half of 2013 and has continued to increase into 2014 providing confidence that this guidance will be met or exceeded during the first half of 2014.
The effect of the collaboration protocol is to reduce car hire periods and therefore to correspondingly reduce revenues in this area of the business, however the cash margin of the business is maintained. Quindell's average claim settlements in this area for hire range from
£1,200 to £1,400 (see slide 18 of Investor and Analyst Presentation Teach-in Day 3) whereas industry average claim settlements are circa £1,900 according to the Competition Commission's (now the CMA) recent review. Under the collaboration protocol they are targeted to reduce to circa £900 (see Slide 36 of Investor and Analyst Presentation Teach-in Day 3). Clearly as a consequence, if the cash margin remains the same EBITDA margin in this area will increase significantly. The percentage of our work operating under this collaboration protocol has continued to increase quarter-by-quarter over the last few quarters.
The above clearly highlights Quindell's focus on driving down the cost of claims for the industry whilst maintaining a strong EBITDA margin for its shareholders.
Legal services was highlighted at the time of the same investor teach-in day to be run rating circa £240 million of revenue and anticipated EBITDA margins of 25.8% (see slides 25 and 26 of Investor and Analyst Presentation Teach-in Day 3). This level of run rate revenue can be compared to the level of case acquisition in legal services which was recently highlighted (in the Chairman's statement in our preliminary results announcement on 31 March 2014) as being internally budgeted for 2014 and beyond for 16,000 cases per month which would represent a run rate of circa £650 million per annum of legal services revenues. This level of legal services revenues is clearly likely to generate a further EBITDA margin improvement from the operational efficiencies implied with the reduction of central overheads as a percentage of revenues.
The slides referred to above together with the explanations above in the Group's previous answers demonstrate clearly that the increase in case numbers handled by each case handler has already improved margins from 23% to the forecasted 25.8% despite the effect of the Lord Jackson reforms lowering the charge for the fixed fee element for legal cases and in fact our actual achieved margins were higher, contributing to the recent upgrade in long-term percentage margins. Around the same time as this legislative change legislation was introduced that allowed law firms to charge consumers up to 25% of their damages for representing them (which in no way affects the cost of claims for the insurers as the money is deducted from the consumers and therefore doesn't increase the claims costs paid by the insurer). Our highlighted 2013 EBITDA margins in this area when comparing our scale to our competitors (who we have already highlighted have achieved over 24% in 2013) are clearly in no way abnormal for the industry and in no way "seem a stretch" as stated by Gotham. It is clear from all of the above that as volumes increase and further efficiencies are made, margins are likely to continue to increase in this area over time.
Again as highlighted in the Chairman's statement in our preliminary results announcement on 31 March 2014 a second collaboration protocol, for legal services leading to the prepayment of legal costs is also continuing to be developed by the Group. Significant interest continues to be expressed by some major insurers in this protocol with the expectation that this will result in a change in the model for the industry that will reduce costs for insurers and accelerate payment of fees to Quindell without any net loss of profitability whilst maintaining protection for consumers. The Group expects that ultimately up to 75-80% of insurers will be operating under this protocol by the end of the financial year 2014, but that roll out will not commence until the collaboration protocol for hire has been completed, as ultimately it is the same teams within insurers that will engage on both. If this level of take-up for this second collaboration protocol is achieved the Directors believe that this could represent a saving of up to £90 million per annum in reduced frictional cost for the industry.
In health services run rate revenues were highlighted at the time of the investor teach in day to be circa £106 million and anticipated EBITDA margins of 6.7%. However as explained above as revenues approach £150 million due to the platform nature of this area, gross margins are anticipated to be over 50%, and correspondingly EBITDA margins are expected to continue to improve significantly (details of this can be found in slides 30 and 31 of Investor and Analyst Presentation Teach-in Day 3). Also within health services, our average claims settlement is targeted to be 20% below the industry average.
Gotham's perspective: Quindell's claim that it seeks to "stamp down the cost of claims" seems inconsistent with its Microsoft / Google-like reported EBITDA margins
Quindell's response: There is nothing inconsistent about stamping down the cost of claims for the industry whilst generating strong EBITDA margins for your shareholders. Many examples of this approach, including the use of the Group's collaboration protocols, are demonstrated in the Group's previous response above. Maintaining this level of EBITDA margin is not possible without significant scale to the business, having a technology enabled self-service platform, operational efficiency and effectiveness whilst still delivering circa 20% cheaper costs than the alternative competitive offerings for the industry. Quindell's management team has a proven track record of delivering exactly this, both at Quindell and in previous operations. Taking fixed cost legal services for example, where regulators have pre- set charge out rates, any efficiency and effectiveness savings, when compared to others operating inefficiently within the industry, have a significant benefit to the bottom line of that business - as demonstrated by Quindell and some of the other market leading peers.
Gotham's perspective: The Chairman of the Transport Select Committee, Louise Ellman recently initiated a probe to determine whether ABSs are used to side-step the Jackson reforms.
Quindell's response: At Quindell our objective is to not only be recognised for our financial success but also the contribution we make to the industries that we serve. The Group has won numerous awards during 2013 and already in 2014 has been shortlisted for a significant number of awards to be concluded over the next few months. Quindell is the largest technology-enabled claims outsourcing business for the UK insurance industry, and the only organisation ethically addressing the total cost of claims including personal injury and rehabilitation. Quindell is recognised as being committed to an ethical and open approach delivering a wide range of professional services. Through Quindell's services, the Group carefully manages the total cost of ownership of its solutions and the settlement of claims to the benefit of the insurance market and its associated service providers, targeting 20%+ saving through programs such as Quindell's collaboration protocol with at-fault insurers. These in turn drive down turnover for the Group whilst maintaining or improving the Group's margins.
Fulfilling on the Group's strategy to date has provided a platform to deliver disruptive business transformation solutions that improve efficiency and effectiveness in our core markets, whilst driving down costs. At the same time, this strategy is enabling us to use this platform to develop combined propositions that are compelling beyond traditional silo offerings, for the marketplace to achieve significant organic growth through extension of their brands in this period of major technological and regulatory change.
All of the above ensures that Quindell works closely with all the relevant industry committees and is an active contributor to the consultation process, along with all the major insurers, on the future shape of the industry. Gotham's statement that there is an industry probe as to whether ABS's are sidestepping the Jackson reforms, this is exaggerated and misleading. The industry in which the Group operates will always constantly be under review as is highlighted by major insurance companies in their annual results and risk statements. However, these reviews do not conclude overnight, and as has been demonstrated by the recent Competition Commission review, any major change typically takes five plus years to effect due to the industry consultation process, legal and structural challenges and competitive considerations. In the past Quindell and its management team have positioned themselves to be ahead of the market with new initiatives (such as our collaboration protocols) and have frequently gained a significant first mover advantage on any industry regulatory change. Therefore, rather then seeing this as a long term risk to Quindell's business model the Group continues to invest and position itself at the forefront of any industry challenges, driving down the cost of claims to ensure Quindell is always in a position to be the business that most benefits from any industry reconfiguration. A further example of this would be Quindell's significant investment and clear first mover advantage in pushing the industry towards mass adoption of telematics to change the UK underwriting model and revolutionise the way that insurance is processed today whilst positioning Quindell as a key industry hub for this disruptive technology, once again driving down the cost of claims whilst delivering a strong EBITDA margin for shareholders.
Quindell's Balance Sheet
Gotham's perspective: Quindell's balance sheet does not resemble a true software/SaaS company's balance sheet. We find that not only are Quindell's 2012 & 2013 reported EBITDAs suspect, its balance sheets are suspect as well. Specifically, we find the balance sheets do not resemble a true software/Cloud/SaaS company's balance sheet.
Quindell's response: Quindell has never stated that its balance sheet resembles a software/SaaS company's balance sheet.Gotham is blatantly contradicting itself having first compared Quindell to a peer group of primarily outsourcing businesses whilst being well aware that only circa 20% of Quindell's revenue in 2013 was Consulting / Software / SaaS related and that circa 80% of revenue was outsourcing related. Gotham was also clearly aware of this outsourcing bias as it is the subject of a number of other statements that an acquisition cost is paid upfront to acquire an outsourcing case such as in legal services (which represents the majority of the Group's outsourcing revenue) where the case is then serviced for several months (and will be recorded in accrued income) until the case is settled at which point it is invoiced and typically paid within 15 to 30 days. This is another example of Gotham knowingly or carelessly misrepresenting Quindell's market position.
Quindell's balance sheet, with net assets of £667.5 million, cash at £199.6 million and net funds of £140.2 million at the end of 2013 (as detailed in the Group's preliminary announcement of 31 March 2014) is extremely strong and more than sufficiently funded to meet market expectations for growth in 2014 and beyond.
Gotham's perspective: Quindell's cash flow from operating activities was quite negative in 2013, and its receivables were anomalously high.
Quindell's response: As highlighted in the Chairman's statement in the Group's preliminary announcement of 31 March 2014, during 2013 a key decision had to be made with regards to working capital versus growth. Should the Group focus on delivering the best operating cash generation possible, as the Group did to prove the sceptics wrong at its half-year results for 2013, or should the Group reinvest cash generated from both divisions to deliver even more sustainable EPS growth for its investors over the long term? Management canvassed opinion of the key influencers of the business. The Group's customers, who wanted Quindell to continue to win business to help drive down the cost of claims for the industry, the Group's internal stakeholders that are key to delivering its success, and existing investors as the owners of the Company. They left the Group in no doubt. They all wanted growth, with major brand wins in the mix, to ensure Quindell had long term contracts and clear independent industry references supporting the success of Quindell's strategy. Management acted, delivering a major contract with Direct Line Group and contracts with numerous other key brands. But Quindell's investors wanted more, and its 100% success in converting pilots into long-term contracts indicated the Group could deliver it. So in November 2013, with very good support from existing and key new shareholders, Quindell raised a further £200 million (net of expenses) to provide the capital to underpin continued significant organic growth during 2014, and set the Group a target for more contract wins that would represent a further £450 million of outsourcing revenue per annum. Since then, Quindell has again delivered on its promise, signing all the contracts needed within fourteen weeks of the fundraise, thus ensuring it can exceed the growth objective set at the time of raising the capital.
Quindell continues to have sufficient working capital resources available including cash at bank, cash generation and debt facilities to deliver over 4p of EPS in 2014. The Group's last objective in this area was that post the fundraise in November it should not need to raise any more capital to support its expectations of organic growth within the Services Division in 2014 and beyond. This of course can only be achieved by continuing to be selective in terms of the work and the amount of growth the Group takes on and therefore by turning away business, for internal processing, beyond the 16,000 cases per month that the legal services operation has budgeted for where it incurs an upfront cost of acquisition of up to £800 per case (in aggregate being circa £12 million per month). This is sustainable due to the significant cash generation that is already being achieved from historic cases and through the cash generation and working capital available within the rest of the Group. This level of case acquisition within legal services remains the Group's internal budget for 2014 and beyond and would represent a run rate of circa £650 million per annum of legal services revenues on this volume of cases. This would imply circa £110 million in health and rehabilitation services and with a budgeted £130 to £150 million of non-fault hire and repair on run rate. These run rate levels would all be expected to be achieved prior to the end of June 2014 and by taking into consideration the announcements the Group has already made. The Solutions Division is already generating significant operating cash inflows for the Group, so clearly has no need for additional funds to meet its on-going cash commitments and has in fact been a major support to the cash requirements of the Services Division during this period of significant growth.
Quindell would not have achieved the level of support for the fundraise, which was significantly over subscribed, in November if it had not met another key objective for 2013 which was to make it clear that the Group's business model today is already generating significant amounts of cash. Cash generated by the Group during 2013 was significant with over £270 million collected from customers. This represents circa 185% of the value of total trade related receivables (including accrued income) as at 31 December 2012, demonstrating the Group's ability to convert our profit into cash. On-going improvements also continue to
be made in trade receivable days, which at December 2013 has reduced to circa 4.7 months (December 2012: 6.5 months, June 2013: 4.8 months) and with significant further progress expected during 2014.
The Group set out to demonstrate that the majority of our growth would be delivered organically. Of the circa £400 million of gross sales for 2013, which included growth of £228 million, only £40 million of this revenue was associated with businesses acquired in the year and in reality more than a third of the revenue that was earned by these businesses would not have been possible had they not been acquired by Quindell. So only circa 10% of our revenue came from acquired or synergistic revenue during 2013 and 90% was delivered organically. Clearly the quantum of organic growth that will be delivered during 2014 having announced new contracts of circa £1 billion per annum even with the timing of the roll out of these contracts across the year, it is clear that the growth in 2014 will significantly dwarf that of 2013. This provides further proof of the Group's organic growth delivery.
Operating cash flow
Gotham's perspective:No free cash flow and negative operating cash flow.
Quindell's response: Cash generated from operations after exceptional costs, and before interest and tax was £3.2 million (2012: £18.4 million). After tax and interest, the Group had an outflow of £8.9 million (2012: inflow of £18.4 million).
This performance was ahead of expectations for both years. The Group delivered strong growth during 2013 across both Divisions and, as expected, this required investment in working capital for the Services Division, where cash cycles are traditionally longer. This investment unwinds in subsequent periods as evidenced by cash collections during 2013 of over £270 million, circa 185% of the value of total trade related receivables for the Group as at 31 December 2012.
Gotham's perspective: 2011-2013 accounts receivable are between 86%-231% of revenue, while deferred revenue only 1%-2% of revenue.
Quindell's response: To simply compare the trade receivables balance at the year-end with the revenues recorded by the Group in the preceding year for a Group that has grown strongly both organically and by acquisition throughout the year is not meaningful. Similarly, whilst more than a third of the Group's profit was generated by its Solutions Division, the vast majority of the trade receivables balance relates to its Services Division, and so to understand the year-end position of trade receivables, this needs to be considered.
Trade receivables increased by only 16% between 2012 and 2013 despite the strong sales growth of 134%. Cash collected by the Services Division during 2013, the part of the business with longest cash cycles, represented 155% of the total value of trade related receivables for that division as at 31 December 2012. Continued strong cash collection also led to average trade receivables days at 31 December 2013 for the Group being maintained at 4.7 months, compared to 4.8 months as at 30 June 2013, which itself had improved from 6.5 months as at 31 December 2012. This remains exceptionally good within the industry and is only possible due to the strong relationships the Group has with its insurance clients and the ethical stance it takes by lowering the cost of claims for the industry as a whole, targeting over 20% saving compared to industry norms. The percentage of trade receivables aged one year or over
decreased both in quantum and percentage from £30.3 million (43.5%) to £24.3 million (33.2%) year on year as the Group has continued to address these older balances through normal collection processes, block settlements as insurers entered into Quindell's collaboration model and in certain instances, as the Group started to take a litigated approach via Compass Costs to collect amounts from the small percentage of the UK insurance market that are not engaging in the Group's collaboration model.
Accrued income increased from £47.9 million as at 31 December 2012 to £93.0 million by 30 June 2013 and to £151.7 million as at 31 December 2013. This year on year 216% increase was again in line with expectations and against a backdrop of dramatically increased legal services case intake but with overall total trade related receivables increasing by only 100% during 2013 compared to gross sales growth of 134%. To state, as Gotham does, that deferred income is only 1-2% of total revenues is also misleading, considering that circa 20% of revenue in 2013 was generated by the Solutions Division. When compared to the relevant segment of the software and solutions revenue, deferred income actually represents over 6%.
Over 60% of legal services cases follow the Ministry of Justice "MOJ" portal processes. These are the simplest cases, are uncontested from an admission of liability perspective. Even so, due to the time it takes to properly assess each case, allow for the extent of injury to be properly determined and to conclude, the insurance industry settles these cases in between five and six months. At this point, the case is billed. Accordingly, as with other professional services firms, almost all the Group's legal services revenues earned in the prior six months remain in accrued income until billed, whereupon they are typically settled by the at-fault insurer promptly within 15-30 days. This also means that as the Group's run rate revenues in this area increase during 2014, accrued income will also continue to increase until a steady state is reached around the end of the year.
Quindell as a private company and founding investment
Gotham's perspective: Nearly all of CEO Terry's £11m personal investment into Quindell
was used to build Quindell the country club.
Quindell's response: Gotham's statement is again provocative and misleading. Rob Terry, as founder of Quindell, has actually invested circa £12 million of cash plus over 10 years of sweat equity. For many of those years Rob's services were being billed out as management services to other companies by Quindell, charging multiple hundreds of thousands of pounds per annum, without Rob taking any material compensation from Quindell for these services.
Rob also, during the period that Quindell was a private company, loaned the company money at various times of up to £2.5 million to meet its investment and working capital needs.
During the period until 2005, Rob was either still a director of The Innovation Group plc. (until 2003) or substantially still under restrictions for the period, therefore Quindell remained primarily a leisure business. In 2005, as highlighted within the publication by Gotham, in addition to the leisure business activities of Quindell, which at this time not only included a golf and country club but also included several other freehold and leasehold leisure related properties, included a significant investment in the office building and infrastructure that became Quindell's head office of the time of its AIM reverse listing in May 2011 (from which it launched all of its operations). From 2005 onwards the company established a number of technology and consultancy related subsidiaries, even though nearly all the assets from these subsidiaries were eventually rolled up into Quindell prior to its AIM listing, Rob had also
independently invested over another £3 million directly into these subsidiary undertakings and their related trading partners.
From 2005 up to circa 50% of all the revenue in Quindell was actually management consultancy charges; including to businesses which were developing technology in combination with Quindell, most of which have subsequently been acquired by the Group or at least the assets from those businesses have been acquired by the Group. Investment also began in 2005 in the development of Quindell's business operating system technology platforms, and subsequently three additional appointments were made from other senior members of The Innovation Group plc. management team; Richard Oliver, Laurence Moorse and Louise Tracey Wyatt (now Terry). Tracey, who had held a senior administrative role in the executive team of The Innovation Group plc. and had assisted with senior client liaison and major bids, also supported Laurence with the finance functions at Quindell whilst it was a private company. One of the core software engines of the Quindell solutions product was acquired via a joint intellectual property licensing agreement with The Innovation Group plc. All of this is fully disclosed in Quindell's 2005 annual report. Despite this, Gotham specifically state that there is no mention of technology until after 2007, again misleading investors and giving the impression that the business was nothing other than a country club.
Over the following years various leisure assets were sold off (today the business owns no leisure assets) and all the money from these asset sales and other property sales flowed back into Quindell to fund the development of its technology, outsourcing and brand extension business which was the core of the business at the time of the AIM listing in May 2011.
However, some leisure assets still remained at the time of the AIM listing, were never hidden, and were fully disclosed within the AIM admission document. These assets were subsequently sold when third party buyers could be found to pay the right valuation.
In summary, when the Group states its "Founder (invested £12m personally) brought Quindell to AIM to buy and build a technology & claims processing platform for insurers", as referenced by Gotham, when all elements are taken into consideration: sweat equity, loans, investments in subsidiaries (where assets were hived up and subsidiaries disposed of) and circa £12 million of direct investment which was made to fund a combination of technology development, office and infrastructure purchase and for leisure assets which were all subsequently sold to fund the core technology and outsourcing business - this is in fact a very conservative statement. The actual level of investment made by the company's founder to establish the business platform that Quindell was launched from was significantly above the £12m that Gotham wrongly state the CEO spent "to build a country club".
Gotham's perspective: Quindell's largest customer in 2009-2010 was itself (ClickUs4.com). In the 2 years preceding Robert Terry's return to the public markets as CEO of Quindell, Quindell recognised ClickUs4.com, an entity owned by Robert Terry (and his relatives), as its largest customer.
Quindell's response: Gotham's representation of the Clickus4.com relationship is based on partial information and is misleading. ClickUs4.com was not originally an entity owned by Robert Terry, it was in fact a 100% owned subsidiary of Quindell. It was a shell with trading losses used to acquire the assets of an unrelated telecommunications business from third party vendors. This was facilitated by the empty shell being sold by Quindell to Robert Terry for £1 who then sold the shell to the vendors, also for £1. The telecoms assets were then acquired by ClickUs4.com in exchange for shares in Clickus4.com. Then this new business was
subsequently re-acquired by Quindell in exchange for Quindell shares. Therefore, the phenomenal revenue growth in ClickUs4.com in 2009, as stated by Gotham, is in fact not phenomenal, it simply reflects the trade and assets of the telecoms business that was transferred into the shell before it was re-acquired by Quindell.
For commercial and funding related reasons, on a monthly basis, a cross charge was made to transfer the revenues and costs from ClickUs4.com to its parent Quindell, effectively consolidating the business into Quindell's balance sheet and becoming its largest customer from a disclosure perspective even though the ultimate end customers were those of the telecoms business that it had acquired.
In 2010, the board of Quindell found evidence of theft of stock and fraud in ClickUs4.com. All of the staff implicated in this fraud subsequently left and were reported to the police and other authorities. For clarity, at this time Quindell was a private company with over 90% owned by Rob Terry prior to the acquisition of ClickUs4.com; so the primary person to be materially disadvantaged by this fraud was Rob Terry as Quindell's principal shareholder.
This situation was fully audited with an unqualified audit opinion and disclosed within the AIM admission document. This had no effect on any of Quindell's revenues, profits or assets subsequent to the Group's admission to AIM and therefore has never affected any public company shareholders. Gotham attempts to suggest that the recognizing of revenue from a subsidiary or related party is used to create a misleading impression by Quindell - this is rejected entirely. Having hived up into Quindell all of the telecoms business following the discovery of the fraud ClickUs4.com was now largely an empty shell. Prior to Quindell's AIM listing in May 2011 certain non-core assets were transferred to the now largely empty shell. ClickUs4.com was subsequently sold to Rob Terry when Quindell was still a private company for an arms length value of £188,695 to simplify the group structure prior to the admission to AIM.
Gotham's perspective: 41% of 2011 revenues come from an undisclosed customer. This entity is unnamed (deliberately we think) but the evidence points to SMI telecoms.
Quindell's response: Quindell can categorically confirm that SMI Telecoms was not Quindell's largest customer in 2011 or 2012. In fact in 2011 the party was not related or it would have been disclosed as a related party in our 2011 year-end accounts and in 2012 it should be quite clear that our main trading partner was Silverbeck Rymer. Silverbeck Rymer was subsequently acquired and following our adoption of IFRS 10 for our full listing process those revenues are now consolidated.
Quindell does have a trading relationship with SMI Telecoms which has been announced by RNS - Quindell is its exclusive global technology distribution partner. The Group also has a 19% stake in SMI Telecoms (also announced by RNS).
The SMI Telecoms technology platform originally had millions of pounds spent on it and was developed in partnership with Nokia Networks whilst SMI was part of The Innovation Group plc. This business was subsequently acquired from The Innovation Group plc. by Phil Brooks, as highlighted in the Gotham document, along with a number of other members of its then management team via a management buyout.
In 2013, approximately 12% of the technology solutions division revenues are telecoms related with sales to major Tier 1 Service Providers such as Frontier Communications and Fairpoint Communications in the US, Vodafone, Arqiva and Virgin Media in the UK and Vodacom in South Africa, amongst others on a global basis. At the time of taking on this global distribution role Quindell inherited three managed offices - SMI's New York, India and Florida managed office locations. There is nothing suspicious or unusual in these circumstances as Gotham imply - they are purely managed office locations providing US mailing addresses or, in the case of the Florida office location, a US support center. Over the last year, there has been consolidation of branding associated with the SMI products to fall under consistent Quindell branding to avoid confusion to our clients. Gotham have noticed some transitional aspects in this rebranding which are quite normal in branding restructuring situations including the title of Phil Brooks who heads up these sales.
Quindell has many offices in numerous countries around the world, including over 100 locations associated with its business in North America.
The managed office locations, considering Quindell trades in these areas as SMI distribution with it's telecoms product set, will probably be more familiar with the name SMI than the name Quindell. To avoid any confusion we have now subsequently removed these managed office locations from our Group website. There is significant opportunities for Quindell to leverage its client relationships with these major Tier 1 service providers which include recent new customers such as Bell Mobility in Canada and SingTel mobile in Asia (who as a group has approaching 500 million subscribers) to launch major telematics insurance distribution programs with customer pre-selection via smartphone and other ancillary revenue opportunities using the Himex virtual world technology.
Quindell's telematics opportunity
Gotham's perspective:QPP's largest telematics customer is itself (via subsidiaries Himex &
Ingenie), accounting for 61% of 2013 revenue.
Quindell's response: On the face of it this is accurate yet it is also a misleading assessment. The Group's relationship with ingenie has in no way been hidden - ingenie was always Quindell's charter client for the development of its telematics propositions and Quindell only owned 19% of the holding company of this business until September 2013 when the group increased its stake to 43% and 4 February 2014 when Quindell increased its holding to 49% and gained an option to acquire the rest in a share for share exchange at any time until January 2015. The other shareholders in ingenie include two of the UK's largest insurers, being Ageas and RSA, and also shareholdings associated with Williams Formula 1 plus a number of independent high net worth individuals who also hold prominent positions in UK public companies including British Airways and BT. Clearly therefore any transactions with the business during 2013 have been on an arms length and fair value basis even though they are also fully disclosed as related party transactions in our full year accounts for 2013.
As disclosed in the Chairman's statement in the preliminary announcement on 31 March 2014, ingenie is one of the Group's biggest customers for its Solutions Division and has been a charter client for the Group for a number of years. In total £9.4 million of revenue was recognised from ingenie entities in 2013. This included work with the core UK business supporting its expansion into the over 25's market ready for the Group's JV with RAC where ingenie and its underwriting partners play a significant role in the future monetization of this
JV and other areas of expansion. Approximately £3 million of the £9.4 million of revenue represented Quindell and third party licenses, telematics devices and consultancy services supporting the launch of ingenie in Canada. The remaining £6.4 million, includes the billing for the areas of expansion highlighted above outside of Canada, and also billing to ingenie, and where appropriate, its underwriting partners for telecoms, SaaS charges, device provision and consultancy services.
Gotham seek to imply that there is something wrong with the billing of ingenie and its underwriting partners and that ingenie's published historic revenues (now a year out of date for a business growing at a rapid rate) would not support this level of billing despite the fact that they are conducted on an arms length basis by a business we only owned part of at group level (in 2013) with other significant independent shareholders involved, including major insurers, and with all transactions having been reviewed by KPMG as part of their audit for any fair value adjustment. Quindell, ingenie and its shareholders clearly fundamentally disagree with Gotham. As we are ingenie's main supplier of its telematics solutions, additional billing will continue to be made in 2014 for the supply of our services and solutions to them, and all these transactions will be disclosed as related party and considered by our auditors for fair value adjustment, until they are consolidated.
Similarly, the Group has also been working with the Himex Group ("Himex") during much of 2013, and became its global distribution partner during that year. During 2013, approximately £9 million of the Group's Solutions revenue was in relation to its work in partnership with Himex including in the US directly and for onward billing to end user client accounts. In addition to these revenues approximately £6 million was billed for the provision of telematics devices acquired at the end of the year to take advantage of volume discounts in conjunction with the RAC on a correspondingly lower margin than the remainder of the Group's business in this area. These revenues were also fully disclosed in the Chairman's statement in the preliminary announcement of 31 March 2014 and with all transactions having been reviewed by KPMG as part of their audit for any fair value adjustment.
The Group's joint work with Himex has been one of Quindell's most significant achievements in 2013 and 2014 to date with revenues in Himex in March reaching a run rate of circa £2 million per month, showing a very significant growth rate compared to run rate revenues at this time last year of less than £0.5 million per month. Revenues grew very significantly in the second half of 2013 and even more impressively in 2014 to date. Why? According to research published in 2013 telematics is already relatively common-place in Italy, the US and the UK, it is estimated UBI will represent over 100 million policies generating over €50 billion in premiums globally by 2020 with market growth increasingly led by the US. In most countries, UBI will be used as a formidable recipe to break against established players and win profitable customers. It will be used both by insurance start-ups and by larger, innovative companies. We also expect new players to seize the telematics opportunity as a way to enter the motor market.
Ptolemus, the strategy consulting firm focused on the telematics sector, profiled Himex positively in its latest industry survey (December 2013). It identified Himex as the only telematics service provider to achieve top rankings across every technology category (black box, OBD dongle and smartphone), and compared the company favourably to Octo and Verizon, suggesting that Himex surpassed them both in its superior breadth of products.
Himex currently has 9 patents either pending or granted across the group. Himex was established to create a motor telematics insurance platform that offers Insurance company
customers convenience, cost saving and entertainment, whilst making roads safer for everyone. Himex's globally unique offering is to combine this with gamification and social media techniques, which strive to leverage people's natural desires for competition and accomplishment by creating "rewards" for drivers who achieve good performance. All of the above is clearly contributing to the significant growth being achieved.
The Group's initial investment in Himex in 2013 and increasing investment to 85% in 2014 (following our investor teach in day in January) we believe will be one of the most profitable and value accretive investments for our shareholders that Quindell has made to date. At the investor teach-in in January the Group explained the success it had achieved with its distribution agreement with Himex to date and with over 60 people attending with presentations given by Quindell, the RAC, ingenie and the Insurance Brokers Association of Ontario all highlighting the value that could be achieved with Quindell's solutions, ingenie's proven underwriting model and the Himex virtual world technology to take telematics to the next generation of true connected car solutions with gamification and significant opportunities for ancillary revenues through micro transactions. Once Quindell's investors understood the full value of the Quindell Himex combined proposition to revolutionize the insurance industry the Group's share price increased significantly over the following weeks.
Even though these two largest customers are both now related parties they are however in fact both channels to end user customers. In the case of ingenie to their underwriters RSA, Ageas and now Covea who have joined the ingenie panel in the UK and are the largest underwriter in France.
In the case of Himex, as well as Quindell lead opportunities which are significant, there are over seven established in Canada and a further seven at final agreement stage as highlighted by the Independent Brokers Association of Ontario presentation at our investor day in January. Himex forms a core part of our JV with RAC in the UK and is due to be rolled out as the next generation of ingenie's mobile phone app which will then of course be used by RSA, Ageas and Covea as ingenie's panel members. However the opportunities are also significant working together in the US with the Himex group already in rollouts with three of the top 20 insurers in the US having conducted pilots with a further four in the top 20 in the US and at late stage negotiation with a further three of the top 20 in the US. In addition, we are seeing very significant levels of interest now being experienced post the recent decision with regards to the Progressive Patent no longer restricting smaller insurers from launching programs in the US.
Beyond this Quindell billed a further £16 million in relation to connected car solutions in 2013 with the vast majority of this revenue billed in the second half of the year contributing to a significant growing SaaS recurring revenue base for Quindell.
Gotham's perspective: Himex's strange acquisitions and allegations of Fraud. 99% & 80% of Himex's 2012 and 2013 balance sheets are seriously deficient (Himex is QPP's largest acquisition).
Quindell's response: Rather than being strange acquisitions, Himex has a coherent strategy to identify, license, acquire and develop technology that together creates a unique platform.
This might be through the acquisition of well-established, profitable companies and/or
through the acquisition of financially distressed companies with unique intellectual property and/or patents. Himex has looked for and acquired certain financially distressed technology companies such as Navseeker Road Angels (ingelby), MML. It is therefore inevitable that a cursory review of historical financial information might suggest a weaker profile than Himex clearly enjoys, as demonstrated by, for example, the Ptolemus research and the custom of major US insurance companies that entrust their brands to Himex in respect of what is probably the most significant insurance initiative in the market today.
The strategy in relation to IP rich, financially distressed companies is to acquire such companies at a low cost, turn them round and further develop their IP on a modular basis (and can therefore operate independently) to become part of Himex's unique technology proposition. Himex's management team has a strong track record in delivering on this strategy. This is in contrast to Quindell's strategy which has been to take not more than a 19% interest in a company before such company was clearly capable of being a profitable, cash generative business.
Prior to Himex acquiring these companies, they had significant investments (believed to be in excess of USD35 million) that had failed due mainly to lack of management's expertise but each company that was acquired provided key engines for the overall Himex platform and a distribution capability in different markets.
Himex can focus on the development of UBI applications rather than developing the engines that power them. All the value to the insurance company is in the application not the engines. This approach accelerates time to market and significantly reduces risk of technology failure.
The claims circulated this week try to suggest irregularities in Himex's group structure where there are none. Like many group companies, Himex trades via subsidiaries and under different brands. Despite attempts to suggest otherwise, this is entirely conventional; it is also inevitable, given the timing of Himex's acquisitions in a swiftly consolidating industry.
Above all, it is commercially sensible. Himex, Evogi/Navseeker, Road Angel Fleet and the other brands sell different products in different markets. Far from raising questions over Himex's viability, the company's subsidiaries evidence the breadth of its technology leadership, and its diversified commercial strength.
Gotham's perspective:Former executives allege Himex/Navseeker lied to them about its financial state and that in effect they were operating a Ponzi-style scheme.
Quindell's response: Gotham is again being misleading as no Himex executive is accused of any wrongdoing in this case. Himex acquired a controlling interest in Evogi/Navseeker with fraud litigation already underway and the Himex management undertook appropriate due diligence in relation to this litigation before making their investment decision. Evogi/Navseeker, an Arizona-based company specializing in UBI and 80% owned by Himex, is currently facing legal action in the US from former executives who worked for the company and left before it was acquired by Himex. Of four separate actions, one has been thrown out of court and two have been settled with no cost to the company. The remaining case is outstanding, but the company is very confident of its legal position and expects a favourable outcome. Contrary to suggestions circulated this week, none of the cases was brought against Himex or any directors connected with Himex; nor are they related to Himex's investment in Evogi/Navseeker, nor linked to any actions by Himex.
In addition, entirely separate proceedings were filed last month in the Delaware Court of Chancery in the case of Baker, Laurence et al vs. Hassan Sadiq et al.
Quindell and its lawyers have reviewed the confidential filing made by Proctor Heyman LLP, US Attorneys who represent various minority shareholders in respect of a derivative action on behalf of Navseeker Inc. dba Evogi ("Evogi") against certain directors of Evogi, Himex Limited ("Himex") and Quindell PLC ("Quindell"). Evogi is an 80 percent subsidiary of Himex.
In summary, the Confidential Filings comprises draft legal proceedings alleging, insofar as they concern Himex and Quindell, that Himex has monetised IP belonging to Evogi without compensating Evogi on an arm's length basis for that IP and, specifically that Quindell has taken licences of that IP from Himex other than on arm's length terms.
Quindell and Himex have confirmed to its legal teams that the technology used by each of them is the product known as "virtual world" (and the legal teams have confirmed that this is the technology which has been monetised in Quindell's two contracts with CAA and IBRI) and that the Evogi specific technology has not been licenced to Quindell. Himex has also confirmed specifically that all contracts to monetise the Evogi IP have been signed in the name of and for the benefit of Evogi.
This being this case, Quindell's legal teams do not consider that the claim against Quindell or Himex has any merit and, in any event, the relief sought, being an injunction to prevent Quindell and Himex making use of the Evogi IP, would not prejudice either of the those companies since that IP is not used by either of them (Quindell has a number of telematics solutions available to it so it would be not be restricted by any such injunction).
In addition, Quindell obtained extensive warranty cover from the sellers when it acquired further shares in Himex to take its holding to 85 per cent of that company and is therefore protected against any unlikely loss or costs to defend this case.
Gotham's perspective:3 auditors in 3 years, since 2011. We've never seen valid reasons for
such high turnover
Quindell's response: There are valid reasons for the changes to auditors to Quindell given the growth in the Group's operations and the change from a private to AIM listed company, to Main Market listing applicant. Moreover, two of the three auditing firms, including the Group's current auditors are part of the Big Four group of accountants and the third was part of a major international accounting group. All of these firms have issued unqualified audit opinions in relation to the Group's accounts.
For the year ended 30 September 2010, Mission Capital plc. was audited by Grant Thornton. Mission Capital plc. acquired Quindell Limited in May 2011, using RSM Tenon as Reporting
Accountant for the Admission to AIM. Quindell Limited's auditor had been Deloitte. The combined business' first major acquisition of a public company in December 2011 was Mobile Doctors Group plc., whose auditors were RSM Tenon. For the year ended 31 December 2011, in light of their knowledge and experience of auditing Mobile Doctors and
given the proximity of the year-end to this acquisition, the Board of Mission Capital appointed RSM Tenon as auditors of the enlarged group.
RSM Tenon performed the audit for each of the two years ended 31 December 2012, but as part of the Group's planned Full Listing, and in response to shareholder requests for a 'Big 4' auditor, the audit was put to tender and KPMG were subsequently appointed as Group auditors in October 2013. KPMG audited the Group's results for the year ended 31 December 2013. The Group and each subsidiary have had an unqualified audit opinion in each of these years, including the most recent results for 2013.
Gotham's perspective:10+ acquisitions lack economic substance. Several of the acquired
companies are little more than paper companies.
Quindell's response: The Group has strict acquisition criteria. This includes where possible, working with the target company over a number of months and/or having pre-existing knowledge of the quality of the management team of the business. Where acquisition consideration is in stock, the Group only issues stock at a significant premium to the current trading price. The Group obtains significant warranties and other protections including forward-looking warranties on future profitability and cash generation on the acquired business. Furthermore, Quindell only acquires businesses where Quindell can add significant value by bringing new customers or relationships. This strategy has been extremely successful and has allowed the Group to win more that £1 billion of organic growth per annum from new business in the last 18 months in addition to acquired revenues. This strategy has also delivered 98% basic EPS growth for the Group's shareholders in 2012/2013. It is predicted by all industry analysts covering the stock that it will continue to provide significant EPS growth and return on capital in 2014 and beyond.
Where the Group acquires groupings of assets or companies, the Group may set up a new holding company for the purpose of the transaction. This was the case for the acquisition of the Quintica group of companies for example, which originally operated as two distinct groups, one for the South African business, and another for the rest of the Quintica group. Quintica Holdings Limited was created in order to pull together the Quintica business into one group of companies which Quindell then acquired shortly after.
In certain cases, such as the acquisition of Simon Hall Associates Limited, a new company was formed and acquired enabling the Group to acquire the services of Simon Hall (formerly Head of Motor Services at The Innovation Group plc). Simon, along with other consultants acquired in a similar manner have been instrumental in helping the Group winning over 1 billion per annum of business as a result of these acquisitions, with internal sales commissions earned by these companies against certain target accounts more than supporting their acquisition value.
All the acquisitions listed by Gotham fall into one of these two categories and have clearly been announced in this manner via RNS. Therefore, we can only assume Gotham has failed to research this or is seeking to mislead investors.
All of these acquisitions have either completed their warranties for profit and cash generation or are on track or exceeding targets to do so.
Tony Bowers, Senior independent non-executive director and Vice Chairman of Quindell said: "It is disappointing that my executive directors have been forced to spend time responding to these allegations. As previously announced, the Company's lawyers have initiated legal action against those responsible for this coordinated shorting attack. I hope with this extensive response to the Gotham "research" that investors will be reassured as to the Company's transparent approach to investor relations. It is the intention of a number of the Directors to purchase shares in Quindell once they receive clearance from the appropriate regulatory bodies. I have personally taken the time to ensure the level of detail of our response meets the needs of all of the investors, including those with whom we have personally spoken. Finally, the board continues to target the Company's move to the Main Market, as stated previously, and is looking forward to our US investor roadshow next week."