Top 5 Qatalyst Interview Questions

Within the world of TMT there are a number of boutique investment banks that punch well above their weight. On the media side, you have firms like LionTree and Allen & Co. On the tech side, the boutique that everyone will point to is Qatalyst Partners.

Qatalyst was started in 2008 by Frank Quattrone, who is by far the best known technology-focused investment banker (although, to be fair, it's not like many investment bankers are household names). 

Regardless, while there's always a level of comfort is joining a better known group - like Goldman TMT - if you think you want to stay in tech in some capacity for your entire career there are few places that are better to begin than at Qatalyst. It also doesn't hurt that analyst compensation is still - along with Centerview - still quite a bit higher than the Bulge Brackets. 

Because Qatalyst takes in so few summer analysts, interviews will tend to be a bit harder. Further, because you'll be dealing exclusively with tech companies, your interviewer will want to make sure you actually have an interest in tech and aren't just trying to join because of Qatalyst's prestige or slightly higher compensation.

One very important thing to keep in mind is that while technology investment banking includes an incredibly diverse array of companies. Interviewers are always impressed when candidates don't just talk about high-flying startups, but also express an interest in areas like semiconductors (which Qatalyst does a substantial number of deals on). 

No one expects you to be an expert. But if you can express an interest in more niche areas of tech - that go beyond whatever the latest tech deal is that's on the front page of the WSJ - you can really differentiate yourself (we cover all the sub-sectors of tech thoroughly in the TMT Investment Banking Guides).

Qatalyst Interview Questions

The following are the style of interview questions you can expect at Qatalyst. You can click the links below to be taken directly to the question and its answer.

1. Could you imagine a scenario in which a deferred revenue write-down takes place?
2. Can you walk me through a deferred revenue write-down of $200?
3. What kind of semiconductor firms would you expect to have a high ROA?
4. How would a company buying $100 of equipment in year three impact the DCF valuation of the company?
5. What's CAC and how can you calculate it?

Could you imagine a scenario in which a deferred revenue write-down takes place?

Many tech companies have moved toward a recurring revenue model - as opposed to charging an upfront, one time fee - over the past five years. This hasn't just been a phenomenon among those selling software. Even classic tech hardware and IT services companies have tried to alter their business model to start collecting recurring revenue (largely due to the greater multiple the market places on recurring revenue). 

As a quick reminder, deferred revenue is generated when a company sells goods of services that haven't yet been delivered or rendered. So, any company that operates on a recurring revenue model will have substantial amounts of recurring revenue because they are billing for services that they then need to render over the next quarter or year (depending on how frequent the billing cycle is).

For this reason, deferred revenue is a liability as the company has received cash from the customer, but still has the responsibility of providing a good or rendering a service in the future.

While it may sound a bit odd, when tech companies are acquired it's not abnormal to see their deferred revenue be written down by the acquirer.

This is a bit of an accounting quirk. When a company is acquired that has lots of deferred revenue - such as a SaaS business that sells annual subscriptions - GAAP accounting requires that deferred revenue be restated down to the estimated cost of performing the obligation plus a "reasonable" profit margin.

However, for most tech companies that are acquired with large amounts of deferred revenue, what they're selling (e.g., access to software) has very minimal operating expense. All the costs went into initially creating the software, not giving continual access to it. As a result, deferred revenue write-downs are unavoidable.

Just to be clear, this doesn't change anything about the actual business being acquired. This is all just an issue of accounting issue that for most companies won't come up as most companies (unlike many in tech) don't have 80%+ gross profit margins on what they're selling.

Can you walk me through a deferred revenue write-down of $200?

First of all, whenever you're asked to write-down anything think about whether it's an asset or a liability. Since deferred revenue is a liability, doing a write-down of $200 produces a pre-tax gain of $200. Assuming a 20% tax rate, we'll have net income up by $160.

On the cash flow statement, we'll have net income up $160. However, remember that deferred revenue increasing is a source of cash (because it's a liability), whereas deferred revenue going down is a use of cash. So, within cash flow from operations (CFO) we'll subtract $200, which leaves us down $40.

On the balance sheet, within assets we'll have cash down by $40. On the liabilities side we'll have the deferred liability down by $200. However, within retained earnings we'll be up $160 from the net income on the income statement. Therefore, our balance sheet balances out.

What kind of semiconductor firms would you expect to have a high ROA?

This is an excellent interview question as it allows the interviewer to see whether you have a rough idea of the types of semiconductor companies that are out there. It's also a great way to differentiate between interviewees because the vast majority won't have enough background knowledge to give an answer.

As was mentioned in the opening of this post, Qatalyst is not only strong when it comes to doing classic tech deals like Intuit acquiring MailChimp for $12b (Qatalyst advised MailChimp), but also when it comes to more niche areas of tech like hardware, semiconductors, etc.

Over the past few years, Qatalyst has advised on many of the biggest semi deals such as Renesas acquiring Dialog Semiconductor for EUR 4.8b (USD $5.9b at closing) and Marvell Technology Group acquiring Inphi Corp for $9.46b.

Not all semiconductor companies have their own semiconductor fabrication plants (which are typically just referred to as fabs). Some farm out the manufacturing in whole or in part. So, semiconductor companies that are relatively asset light and farm out most of their manufacturing (e.g., Nvidia, 23% ROA) are going to have a relatively high ROA compared to those that do almost everything in house (e.g., Intel, 12% ROA).

How would a company buying $100 of equipment in year three impact the DCF valuation of the company?

At a firm like Qatalyst, most DCF questions you'll be asked will be about how the company doing something (raising debt, issuing a dividend, selling an asset, etc.) does or does not impact the DCF valuation of a company. These are great questions to ask because they're relatively short to answer, so you can get through quite a few in a 30-minute interview.

Remember that when finding unlevered FCF, capex (along with changes to NWC and D&A) come after taxes. So, an increase of $100 in capex in year three would lead to a reduction of $100 in unlevered FCF for that year.

However, this $100 reduction in year three won't equate to the enterprise value found via the DCF being reduced by $100 (because we still need to discount it to find the present value).

Assuming mid-year convention, the present value of this $100 reduction would be: ($100 / ((1+WACC)^2.5)). If WACC were, for example, 10% then the enterprise value found via the DCF would decrease by $78.79 due to the $100 increase in capex.

Note: If you're asked this type of question about capex, changes in working capital, or depreciation / amortization the process to answer the question would be the same (but, of course, if there's a decline in NWC that would be an increase not a decrease). 

What's CAC and how can you calculate it?

CAC stands for "customer acquisition cost", which is obviously an essential metric for any SASS or DTC business. There are a number of ways to calculate CAC depending on the amount of information that you have.

For example, CAC could be found by looking at a Google Adwords campaign you ran and setting a pixel to fire every time someone signed up after clicking one of your ads. This would obviously get you a granular level of insight into one of the ways people sign-up or checkout from your business, but wouldn't encompass all the ways that you get people signing up.

Practically speaking, whenever you're looking at a company from the outside the most granular data you will have will probably be in the financial statements. So, if you just have access to the financial statements of a company, you'd take sales and marketing (S&M) expense in the preceding quarter and divide it by the number of new customers in the current quarter. This quarter lag is meant to illustrate that often consumers need to be exposed to S&M for a period of time before becoming customers, etc. 

The reality is that despite CAC sounding like a rather objective measure, it's incredibly hard to know for sure what it is. For example, not everyone who clicks your Google ad would sign-up right away. Maybe they wait a week and sign-up using a different computer (thus this sign-up wouldn't appear, using your internal metrics, as being directly attributable to your Google campaign even though it was).

Further, using S&M expense and a lag of a quarter is imperfect for a myriad of reasons as well. Not least of which is that often people will see ads and then months (or years!) later sign-up or make a purchase.

However, when trying to figure out CAC what you want to do is create a metric that is relatively objective and can be repeated quarter after quarter. So, while using S&M expense may not be truly accurate it will be almost certainly be directionally correct and that's why it's the standard approach to use.

Note: By directionally correct I mean that if you see this metric of CAC rising over time, it almost certainly means that customers are actually becoming more expensive to acquire (even if we aren't capturing the exact customer acquisition cost perfectly).

Conclusion

Well, there you have it. If you're at all interested in tech investment banking - and like being on the West Coast - then Qatalyst is a phenomenal place to land. 

As we've discussed elsewhere on the site, you do need to be cognizant of the fact that your interviewer will want to make sure that you have a good reason for wanting to do tech banking beyond the fact that it's so popular right now.

In particular, the singular best way to standout in an interview is to show that you understand the diversity of tech banking and that it's not all high-flying deals between household names like Facebook or Amazon.

Being able to talk about recent semiconductor deal trends, or the increase in activity of sponsors in vertical software, etc. would really impress your interviewer and separate you from other candidates. 

As always, hopefully this post has been helpful. If you're interested, we've put together a longer list of TMT interview questions and a TMT investment banking primer you can check out. Further, if you're looking for something even more in-depth, there's also the TMT guides we created that contain over 300 interview questions.

Good luck in your recruiting!