Quixant - AIMing for Gaming Success


Quixant Logo

Quixant (LSE:QXT) has had an impressive start to its AIM career having joined the market in May at 46p. The shares currently trade ~58% higher at 72.5p having peaked at just over 90p/share on a closing-day basis. Quixant deals with the development and manufacture of computing platforms for both slot and gaming machines. Upon the admission to the LSE, the company, which is based in Cambridge, raised net proceeds of £3.10m through an oversubscribed placing and a further £0.67m with a range of institutional investors. Quixant subsequently has approximately 64m shares in issue and is captialised at £46.86m. With the shares significantly ahead of their original IPO price, Quixant has proved in recent years that it has the potential to exploit a growing market and continue to do so in the future.

In the case of Quixant, there is no technical analysis to be complete due to the lack of historical price data available. A few features are present and as noted, the volumes remain relatively low in absolute terms. This is mainly because newly listed shares are overlooked by the majority of investors, but also the bid-ask spreads tend to be larger due to the relative illiquidity. The spread currently exceeds 5%.

There is one notifiable institutional shareholding by Octopus Investments who, as per the last holdings RNS, held 6.24%, equivalent to just over 4m shares. However, a quick bit of research reveals that many other institutional investors have jumped into buying Quixant. To name a couple, the "Elite Webb Capital Smaller Companies Income and Growth Fund" (although the holding is not in their top 20 largest) and Hargreave Hale's venture capital trust both purchased shares in the company. Such strong industry backing so soon after listing is a strong vote of confidence in the company and although the share price has dropped off from the peak, this can be attributed to a bout of profit taking and re-adjustment.

Directors also have a material holding in the company. Managing Director Nicholas Jarmany holds over 38% of the company's shares alone with the entire board holding a massive ~60.5% of the issued share capital. Other than institutions, other major investors in the company also exist who snap up a further 21.07% of the shares between them. The result is that there is a relatively small number of shares available for investors to purchase at probably around 10-12%.

Moving onto the company itself, Quixant was founded in 2005 by a group of individuals, three of who are currently on the board of directors: Nicholas Jarmany, Gary Mullins and JJ Lin. The three directors also formerly held roles in UK firm Densitron (LSE:DSN) although have split off since. The board holds considerable expertise within the technology sector and also within the running of a publicly listed company which can only bode well. The company has four offices in the UK, Italy, the USA and in Taiwan where the company also has it's own manufacturing facility which allows for Quixant to be very competitive in that it gives them cost-efficiency and scalability. Sales are not within particular countries, but rather to companies that utilise Quixant's platform as a part, to create an end product which they distribute. The listing would provide the company with headroom to increase its working capital, be used to further incentivise employees, but arguably most importantly it will add to the credibility of the company by building its corporate image.

Quixant's 'high-end' QX-40
What makes Quixant's platforms particularly useful is that it adheres to all regulations required by gaming industry legislation meaning that games/slots can be changed quickly making the customers life easier, which is what the group focuses upon. The product chain is split into three main tiers; high-end products such as the QX-40 platform, mid-range and low-end products. To a lesser extent the company also has a separate product specifically for the Italian 'low-end' AWP machines in Italy.

Quixant also has a unique partnership with US giant Advanced Micro Devices (AMD) which is classed at "elite". This allows Quixant to obtain new AMD releases before they are generally available on the market allowing product development beforehand so that both the Quixant product (with the AMD parts) and the raw AMD parts are released to the market
concurrently which immediately gives Quixant a first-mover advantage for new technologies. Most of the other benefits of working with AMD are technological and to do with shared expertise.

The group has a strong commitment to participate in leading exhibitions such as the BEGE exhibition in the Balkans and G2E (The "Global Gaming Expo") which is next set to be stages in late September 2013. Due to the success during 2012, Quixant has committed to using a 170% larger stand this year.
"It is the Directors’ ambition to grow the business over the foreseeable future, capitalising on the progress made to date in broadening the customer base, securing new long-term customer contracts and building the brand of the Company to the extent that the “Quixant” name becomes synonymous with the standard for specialised gaming computer systems."

Quixant has estimated that currently over 7.9m gaming/slot machines currently exist worldwide and that the sector growth will increase by in excess of 9% over the next three years. This move is likely to be backed by deregulation of gambling activities such as those that have taken place in some states in the US such as New Jersey. Part of the reason for the move is to boost economic growth and receive increased tax income - nonetheless, it will likely prove a welcome stimulus to those companies that manufacture and operate the venues.
Quixant's 'low-end' QXi-200

In 2012 the group shipped ~18,500 units and the group's market share currently lies 'well below' 1% hence there is plenty of scope for increasing this, and with the financial results that Quixant is reporting there is no reason why this cannot be achieved. Within the admissions document Quixant noted three points that give reason for optimism:
  - Over the last two years, the Company has gathered pace in gaining market share, securing three major design-ins with mid-sized manufacturers over the last twelve months
- The Directors believe that Quixant’s listed status will facilitate the Company winning business with larger customers
- Given the Company’s current small market share and the potential to grow market share through additional business with new customers, the Directors believe that Quixant’s growth is not dependent on the eventual upturn in the global economy and resultant recovery in gaming and slot machine replacement cycles or demand for new machine

Between FY 2010 and FY 2012, the group's revenue has soared from $5.3m to $21.6m with pre-tax profits following this trend from .6m to $4.8m. Post-tax profits tracked the rise ending up at $3.8m for 2012. Earnings per share stood at 6.4 cents in 2012 which currently means that the share is trading at 17.4x 2012 earnings. For FY 2013 it would be reasonable to expect revenue to grow to around $22m with the pre-tax profit exceeding $4m and EPS being closer to 7 cents. Should these figures stand, the company is currently trading on 15.9x 2013 earnings which in-line with the average for the industry. (These figures are also quite conservative so if the company can gain traction with expanding its customer base then results higher than this should be expected, and indeed some brokers are forecasting higher figures than this).

However, in the US, International Game Technology (gaming machine manufacturer) is trading at a PE ratio of 18x 2012 earnings and 14.3x 2013 forecasts. However, this is not universal. In this sector, if the company boasts strong growth potential then the shares can attract a premium. An example of this is shown through Australian firm Aristocrat Leisure which currently trades on a PE ratio of 24.2 whilst NYSE listed firm Bally Technologies trades at 28.6x 2012 earnings and 20x 2013 estimates. From this point of view, there is room for improvement in Quixant valuation, especially over time. (PE ratio data found via NASDAQ)

Looking at the balance sheet there were also some other points to note (valid for 31st December 2012 when the finances were compiled):
- Inventories stood at $2.4m
- Trade and receivables stood at $4.37m (the company has taken out provisions against doubtful receivables). The company takes an active approach to monitoring these and where possible asks for payment to be in advance or upon delivery
- Trade and payables stood at $3.68m
- Net debt stood at $476k although this likely will have been mostly erased through the placing
- Cash and cash equivalents stood at $1.8m
- Employees increased to 58 and directors salaries totalled $489k
- The board intends to pay dividends when the financial position of the group permits
- By 2015 the company will benefit (like all UK companies who qualify) from a reduction in the UK corporation tax that is set to hit 20% 

Ainsworth has enjoyed a meteoric rise
One risk that is associated with Quixant is that is gains a 'significant majority' of its turnover from Australian giant Ainsworth Game Technology who they have a supply agreement with until 2015. Should this not be renewed, as it stands the group would be set to lose a material part of its turnover. However, this is still a year and a half away and there is a possibility that a supply agreement can be extended should Quixant have provided high quality products in an efficient manner - it is far too early to assume that though so it remains a clear risk. While the group has been diversifying away through gaining more customers (currently 50+), it would be silly to overlook the sheer value that Ainsworth contributes. Ainsworth has seen its share price rocket over the last two years which has occurred as the group's financial position has improved. As recently as H2 2012, the group announced that revenues had grown by 41% over 2011 with pre-tax profits up 60% which should help Quixant's financials. Nevertheless, the group has managed to increase the number of firms who contribute $500k+ in revenue from 2 in 2011 to 6 in 2012 which is positive for the future.

The group's forward strategy remains to exploit what they believe will be a move away from in-house manufacturing of the systems by the machine manufacturers themselves, and a shift towards outsourcing the job to specialist manufacturers such as Quixant. This will be driven through an increase in the complexity of systems required and thus it will be more economical and efficient (in most cases) for a third-party to develop the platform. Long development cycles do remain a cause for concern with up to 18 months required to create the platform and product lifetimes of in excess of 5 years. Whilst this can be considered a negative, as revenues continue to get ramped up, it does actually provide forward visibility for the company. To that end, according to Edison, the company is expected 'to go into mass production' with 2 tier-two (5,000-25,000 units shipped per annum) companies during H2 2013. It is believed that tier-one (25,000+ units per annum) manufacturers such as International Game Technology could be increasingly looking to outsource.

So this brings us back to the question, does Quixant represent a good opportunity for investors. My opinion is that is does through offering high growth potential bundled with an experienced management team and a strong financial position. Risks do exist, the biggest clearly being the Ainsworth supply agreement and the negative implications that a loss of this could cause. However, the board has ample time to convince investors that this is not an issue and it is not uncommon to see start up companies using a large player to get off the ground before diversifying anyway. Although the shares are far higher than when they listed and the company is a relatively risky proposition, potential remains and for that reason I have put Quixant as a buy on the review results page.

UPDATE 23/10/13 - I have moved Quixant from Buy to No Rating at 123.5p following a 'Statement re: Share Price movement' RNS shortly ago. At this level, the valuation is in excess of £80m and based on my EPS predictions, the valuation looks stretched. Worth waiting to see if it falls back further. The return on this investment has totalled 70.3%


  1. MMs seem short of stock this morning as its hard to place an order! I'll watch carefully for signa of life then make a decision with my own research :)

    Thx el1te

  2. thorough and interesting, thank you as always

  3. I'll take a look!

    thanks for the heads up

  4. Thanks, I have put it firmly on my watchlist

  5. Hi El1te,

    I realised you moved this off a buy rating about an hour ago. Does this mean you are now bearish on the company?

    Elliott Griffins

    1. Hi Elliott,

      Certainly not bearish on Quixant by ans measure. Just feel that the current valuation is not supported by the financials. That could change hence why I want to see how H2 turns out first.