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EP207 · Economy · first published 2023-08-16

Qt and Revenio delivered a beating | Kevin van Dessel | Negotiator 207

Kevin van Dessel of Sijoituskästi joins Sami Miettinen in August 2023 for the second time. This short episode works through two crowd favourites of the Finnish bargain bin, Qt and Revenio, both punished with heavy share price falls after the second quarter. This write-up explains Qt's licensing model and why Revenio is the mirror image of Qt in the same hardware-to-software transition, and covers the closing thesis on interest rates: an inverted yield curve offers the same multiple reversal without company-specific risk. The episode is not investment advice and neither is this article.

Sami Miettinen · Sections: AI and the Economy

Qt and Revenio delivered a beating | Kevin van Dessel | Negotiator 207

Summary: Kevin van Dessel of Sijoituskästi joins Sami Miettinen in August 2023 for the second time. This short episode works through two crowd favourites of the Finnish bargain bin, Qt and Revenio, both punished with heavy share price falls after the second quarter. This write-up explains Qt’s licensing model and why Revenio is the mirror image of Qt in the same hardware-to-software transition, and covers the closing thesis on interest rates: an inverted yield curve offers the same multiple reversal without company-specific risk. The episode is not investment advice and neither is this article.

A note on reading this

The recording is from 16 August 2023, and the episode is short — about seventeen minutes. Four caveats:

1. The setup: the bargain bin and what failed to happen

A year earlier, at the same table, they had speculated about whether there was a bull market after all. The episode’s starting point is that the big crash never came: the collapse expected with the downturn did not arrive, and growth stocks have held their ground in the United States.

Finland is a different case, and van Dessel’s observation is structural rather than cyclical:

In Finland there are always small companies that are a bit in the bargain bin. I don’t know whether that is a good or a bad thing.

Miettinen attaches the familiar investment thesis — small caps should outperform large ones over the long run — and its immediate caveat: it is cyclical.

Two crowd favourites, Qt and Revenio, were chosen because both are quality growth companies punished with heavy falls after the second quarter, when growth was not as convincing as before.

2. What Qt is — the best plain explanation the episode gives

Van Dessel borrows a comparison used by Mikael Rautanen in his analyst days, and it is still the clearest thing in the episode:

Where Word is a tool for people who want to write, and Photoshop for people who want to edit pictures, Qt makes the tool for software developers — the one you code with more efficiently.

The focus is on embedded systems: the digital display on a fridge, a car dashboard, a measuring instrument. Qt is what you build their user interfaces with.

Miettinen adds the history that explains the product’s character: Qt is Nokia-derived, and originally the code of the Norwegian company Trolltech. It has become a platform-independent development environment and an open source project. He says he first heard about it in his Nordic Trustee days from a Norwegian counterparty — an aside that conveys how long the product’s history is.

Van Dessel compares that platform independence to Unity: it too is a layer on top of which a program can be written once and run on many kinds of hardware. The comparison is useful because it separates Qt’s product from the applications built with it — what is sold is the layer, not what is made with it.

The business model: three revenue streams and one expectation

Revenue stream What it is
Consulting delivering the customer’s project
Developer licences companies pay so that their developers can use the Qt framework
Distribution licences when the end product sells, Qt takes a commission-like fee on each unit

The example in the episode is the Mercedes A-class display: as the cars sell, Qt earns distribution licence revenue. This is what produces the scaling.

And attached to it is the episode’s sharpest observation about investor behaviour:

Every year people wait for the distribution licences to exceed the developer licences. And every year it has not happened yet — but maybe one day it will.

Miettinen sums up the model’s cash flow profile: costs come up front and revenue comes later. The development work is partly a one-off sale that binds the customer to the platform, and the reward arrives as a long tail — SaaS-like recurring billing. Risky, but richly rewarding when it works.

3. From hardware to software — the thesis that carries both companies

This is the analytical core of the episode and it is unusually clearly put.

Value, margin and price used to come from the hardware: in a Nokia phone the software was modest, and the thing was the physical, kickable device. The direction of the last decade is the other way:

In a phone the hardware is fairly simple these days — the shell and the components. That is not what brings the value. The software defines the whole user experience and how good the phone is.

Van Dessel’s prediction is that the same will be seen in many other devices — fridges, washing machines, smart homes — and that it creates, at least in theory, demand for frameworks like Qt.

And from this follows the episode’s best single insight: Qt and Revenio are each other’s opposites in the same transition.

4. Revenio: smaller revenue, the same profit

Van Dessel’s description of Revenio is compact and has four parts.

  1. Profile. Revenue is about half Qt’s, but profit is almost the same. The profitability profile is therefore better, growth slightly lower.
  2. Product. Eye pressure meters and their sensors. More products and some software have been added around the genre, but the software has not performed as well as the other products.
  3. Position. The company is overwhelmingly good in a very small niche and has taken a large share of it. The original measurement technology was patented; van Dessel says the patents have since lapsed, but no significant competitors have appeared — perhaps precisely because the market is so small. That is his assessment of the reason, not a verified observation.
  4. Direction. Still mainly a device business: eye pressure and the back of the eye are measured, with more complex devices and even AI-based pattern recognition built on top — but the centre of gravity is still firmly in hardware.

5. Hardware enabled SaaS — the Translink angle

Here Miettinen brings in his professional perspective, and it is a material interest: his investment bank Translink Corporate Finance is, in his account, the strongest in Finland at selling and financing SaaS businesses.

The concept he uses in board presentations and training is hardware enabled SaaS, and it applies directly to Revenio:

You can have quite a dull product, but if it creates data, a software company can be built out of it over time through a SaaS platform. But if the hardware is dumb and reads no data at all, that is not possible.

In Revenio’s case the condition is met: the hardware is superior and it measures things that matter. The question is whether software can be made out of the data — and whether the software is any good.

The risk of walking over your own customers

The sharpest risk observation in the episode, and it is different for each company:

Van Dessel does not dispute the risk but puts it in context: good products usually solve these problems too, and the cost ends up cheaper for the smaller customer. Whether it succeeds is an empirical question.

6. Valuation and what melts off it

The most concrete figure in the episode: Qt peaked above 170 euros and was around 66 euros at the time of recording.

Van Dessel’s explanation is mechanics rather than opinion, and it is worth reading carefully:

When a large part of the value is in future growth and those cash flows are far away, a small change has a big effect on present value. The company is still good, and the share price has not tracked the development of the business — but the valuation was that high.

Miettinen adds the same as an image that sticks better: a high P/E contains a lot of fluff and fat that can melt. And van Dessel’s own lesson from the Covid dip is exactly this: the risk in expensive shares is not business risk but multiple risk, and Qt is a splendid example of it.

Miettinen mentions having bought a couple of companies for amusement on “exactly the inverse strategy” — the same price effect but weak fundamentals, “cigar butts” in the episode’s phrase. It is a counter-example, not a recommendation.

7. Investor psychology — fifty per cent underwater

The episode’s most human and perhaps most usable passage, and it is a worked example:

If you go into Qt when it dips, buy at 70, add at 120 and then it halves to 60 — that puts your head through a mangle at that point. What is the right value for this, where am I now, and you start to hate looking at it when you are 50 per cent down.

Van Dessel’s conclusion is short: it is striking what a dip does to your own investor psychology. Miettinen answers even more briefly — you must not let emotion in — but neither claims it does not happen. That is the passage’s value: it does not offer a solution, it names the phenomenon.

Miettinen also makes an observation that can be checked afterwards: peripheral markets, which Finland belongs to, get punished with a heavier hand than many others.

8. The rates thesis: the same trade without company risk

The closing thesis is what separates this from an ordinary stock episode.

The bull case for growth companies. Van Dessel judges that there is not much upward pressure left on rates — the European economy, in his view, would not take much higher ones — and that over the longer run the pressure is more to the downside. If rates fall, distant cash flows become more valuable, multiples rise, and that creates upward pressure on growth companies. The rate level at the time of recording is given in the episode as over four per cent, against about two at the previous visit.

And then the other way to play the same trade. Miettinen describes having worked through with Ivan Puopolo on Neuvottelija Platinum how the same multiple reversal can be obtained with US Treasuries:

The core observation, though, is more general than any single instrument:

You do not necessarily need a share. You can get a similar effect with rate instruments without company-specific risk.

Van Dessel’s reaction is honest and it says something about a generation: he has never invested in bonds, it feels like an old man’s game — but he concedes immediately that his entire investing career has been spent at zero rates, when rates made no sense. Miettinen admits the flip side in his own case: rates have never been a large weight for him, so he has also avoided the loss the rate rise caused.

Claims presented as claims

What stays with you

  1. Qt and Revenio are two sides of the same transition. If value moves from hardware into software, that is a business model for one and a risk for the other.
  2. A high multiple is a risk category of its own. A share can halve without anything comparable happening in the business — and that is the hardest thing to sit through.
  3. The hardware enabled SaaS test is simple: does the device create data. If it does not, there is nothing to build a software layer out of.
  4. The multiple reversal can be bought without company risk. The same view on rates that makes growth companies attractive can be expressed directly in rate instruments.

How the episode runs

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