Redknee’s Q3 revenue could surprise to the upside, says Clarus

Because of multiple upgrades and contract renewals, Redknee’s (TSX:RKN) third quarter revenue number could be higher than expected, says Clarus analyst Eyal Ofir.

Ofir says he expects Redknee will generate EPS of $0.03 on revenue of (US) $62.7-million in its Q3, 2014, which is due Wednesday. The analyst thinks a revenue bump might come from increased third party hardware and software sales, which have a lower margin profile overall. Under this scenario, Redknee’s revenue number would be higher, but its bottom line would not move much.

The Clarus analyst says he does expect quarter-over-quarter improvement in Redknee’s gross margins. He is modeling margins of 55%, up from 48% in the company’s second quarter. Another number he will be watching closely is recurring revenue, which fell from the company’s norm of about 60% to a historic low of 36% in Q2.

In May, Redknee reported its Q2, 2014 results. The company earned $4.8-million on revenue of $72.4-million.

Overall, Ofir says he remains bullish on Redknee because of a “significant” number of expansion and upgrade opportunities from its acquisition of Nokia Siemens Networks assets, and a number of other contracts it is bidding on.

In a research update to clients this morning, Ofir maintained his “Buy” recommendation and C$6.75 one-year target on Redknee, implying a return of 41.5% at the time of publication. His target, he says, is based on 21x his estimate for the company’s adjusted EPS in 2015.