Quindell (LSE: QPP) published a third-quarter trading update this morning.
Although the headline figures were positive — revenue up 115% to £198m and adjusted earnings up 141% to £83m — Quindell has now cut its revenue guidance for the year by about 10%.
Quindell is now forecasting revenue of between £750m and £800m this year, down from its previous guidance of £800m-£900m.
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What does this mean?
It’s important to remember that most of Quindell’s revenue is ‘accrued income’ — expected income from legal cases that has not yet been invoiced or collected.
If Quindell is cutting its revenue forecasts, this could mean the firm is reducing its payout forecasts for its current backlog of compensation cases.
The company’s reported today that it has applied “a further c.30% case number dilution provision” to its hearing loss cases — I suspect this may mean that fewer cases are expected to pay out than previously thought.
Falling sales = rising profits?
Despite cutting its revenue guidance for the year, Quindell says its board “remains confident” of meeting full-year targets for cash generation and adjusted earnings.
This will be possible, according to Quindell, because the firm’s profit margins are rising. In today’s announcement, Quindell increased 2014 EBITDA (earnings before interest, tax, depreciation and amortisation) margin guidance to between 40% and 45%.
This is the third time this year the firm has increased EBITDA margin guidance: in July it rose to “35 to 40%”, then in August it rose to “35% to 45%”. Now it’s risen again.
Can Quindell really deliver on these ambitious figures?
Hearing loss bonanza?
Quindell says that it currently has around 44,500 hearing loss cases in progress. The firm also says that its thorough vetting process means that 75% of potential claims are rejected.
As Quindell has only been working on hearing loss cases for around a year, this suggests the firm has been approached by around 178,000 potential claimants over the last year.
These numbers seem very high against industry-wide figures: the Institute of Actuaries estimates that just 80,000 hearing loss claims were made in 2013, and only 10% (8,000) of those resulted in a payout.
Too good to be true?
In my opinion, today’s cut to Quindell’s revenue guidance could be an early warning of more serious trouble ahead.
I can’t be sure I’m right, but it looks like the market agrees: Quindell’s share price has risen by around 5% this morning, but remains 30% lower than it was at the start of July.
