Sandstone Insights: Qoria leads the way in school and family safety technology

ASX code: QOR

Suggestion: Buy

Need to know

• Qoria Limited (QOR) is an early mover in the growing school and family safety technology services sector, providing children and students with safe access to the internet
• The company has undergone significant evolution since listing through mergers and acquisitions (M&A) and now has the appropriate product offering and sufficient distribution
• Improving margins see the company targeting cash flow breakeven throughout the second half of the calendar year 2024 and beyond. We commence coverage with a Buy rating.

Company overview

Qoria’s evolution from FamilyZone to a safety tech leader

Qoria Limited, formerly FamilyZone, has undergone a significant evolution since listing in 2016. It was an early mover in the growing category of school and family safety features delivered through technology by providing children and students with safe access to the internet. The company has built its geographic and product set through a mix of M&A and internal investments to target four key focus points: Prevention, Intervention, Education, and Consumer.

The key product offerings are supported by regulatory tailwinds, and there is considerable growth across the group. In Prevention (the largest contributor to the group), Qoria offers firewalls and filters in addition to classroom management features, which charge around $2.50-$3.00 per student.

Expanding into intervention and education for holistic safety

Intervention is an emerging area of focus, with products that allow schools to detect in real-time children at risk. Another element surrounds wellbeing surveys and other student engagement tools, all aimed at supporting early interventions. Qoriaestimates the intervention market is growing at around 30% per annum.

Education focuses on being the preeminent resource for online safety. This is a relatively new area and currently contributes little to group revenue. Qoria estimates Education is also growing at around 30% per annum. We expect Qoria to implement price increases in June.

Consumer segment gaining momentum with Qustodio app

Consumer encompasses Qoria’s direct-to-consumer offering and is predominantly driven by the Qustodio application, which allows parents and carers to provide controls at home, such as limiting screen time, blocking harmful content, and tracking smart devices. This segment is growing at around 12% per annum, although Qoria is continuing to deliver consistent growth above 20% as it experiences strong momentum in account creations in the Community offering, with a focus on monetisation likely to occur next year.

Revenue and profitability on the rise

The company has doubled its annual recurring revenue (ARR) from $52 million in 2021 to $106 million in 2023, both through organic growth and acquisition. It has guided for the ARR exit rate in June to be $117-$120 million. We also believe the company is entering a period of attractive incremental earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins as it implements cost-reduction programs.

The balance sheet remains strong, with $26.4 million in pro forma available liquidity following its announcement to divest a subsidiary of Qustodio, resulting in a $6 million cash flow improvement in the calendar year.

ARR doubled since 2021

Investment view

Qoria positioned for sustainable growth and profitability

Qoria has demonstrated solid growth since listing in 2016. While there have been some missteps along the way, we now believe that QOR has the right product offering and sufficient distribution to achieve consistent growth and, eventually, profitability.

Its product offerings are supported by regulatory tailwinds, and it has a first-mover advantage in the school and family safety industry. It has four distinct pillars, each with its own set of tailwinds, with growth expected in the high 20%+ for the next 3-5 years.

Cost management and global expansion led by a proven leadership team

A successful cost-out program underway should deliver incremental EBITDA margin growth, and we expect EBITDA profitability by FY25. We expect school and family cyber safety to become more commonplace over time, and Qoriais well-positioned to benefit from this growing trend.

QOR is well diversified across geographies given recent acquisitions. It currently boasts a presence in over 100 countries, impacting over 22 million children, 6 million parents, and 27,000 schools. There is therefore a significant total addressable market left for QOR to target. We estimate there are at least 115,000 schools in the US alone.

Current Managing Director Tim Levy has been with the business since 2014, overseeing its growth. He holds 1.8% of fully diluted ownership.

Valuation comparison highlights Qoria’s growth potential

There are few listed comparisons, with the majority of direct competitors being privately owned. In 2021, GoGuardian, the most comparable company to Qoria, raised $200 million from private equity firm Tiger Global Management, valuing the company at US$1 billion. This was based on revenue "well north of $140 million annually," which equates to an EV/Sales ratio of 7x, though no direct financials have been disclosed.

We believe that for the growth QOR is delivering, a forward EV/Sales ratio of 4x is fair. When we compare this with the closest listed ASX peer Life360 (360.AX), which is trading on an EV/EBITDA ratio of 14x for FY26E, QOR is currently trading on 11x EV/EBITDA FY26E and is expected to show a significant ramp-up in EBITDA profitability over the coming years. We commence coverage with a Buy rating.

Qoria's EBITDA margins

Risks to investment view

• Technology advancement

Although Qoria has a strong team of IT experts and is optimally utilising technology, QOR and other technology companies are constantly at risk of technological advancements. Emerging technologies are advancing at a rapid pace; these developments can potentially change the way cyber security operates, and QOR needs to be aware of these potential changes

• Competitive risk

There is the potential for the actions of a competitor, or multiple competitors, to negatively impact QOR's market share or revenue through significant competitor price changes or innovation in the sector

• Data failure

The management and protection of customer data is an important element in the continuing operations of the business. Unexpected cloud-based disruptions may impact the day-to-day operations for customers of QOR and could also materially impact sentiment and reputation in the event of a hacking or breach

• Decline in international market conditions

Operating in many geographical segments exposes QOR to interest rate, currency, cost, and other macro-economic risks such as geopolitical threats

• Customer loss

At this point in time, QOR is facing low churn rates from its range of customers. However, this may not always be the case and in the environment that QOR is currently in, the valuation and sentiment of the company rely on strong revenue momentum, which may be impacted if it were to experience higher churn

• Investment risk

QOR has had an active M&A program over the last few years, and whilst this looks to be over for the time being, there is still a window of execution and integration risk

• Liquidity risk

QOR is a small stock with less liquidity than other stocks. It may be difficult to get in and out of the stock in a timely manner

• Profitability risk

QOR is not yet profitable and as such is flagged as a higher-risk stock, although it is anticipated that QOR will achieve cash flow breakeven by the middle of 2024.

Qoria's total features overview chart

• _{The information provided by Sandstone Insights does not constitute investment advice and does not have regard to the specific needs of any person who may receive it. No warranty is given as to the accuracy or completeness of the information and any person acting on it does so entirely at their own risk.}