Laurentian lowers price target on TECSYS to $11.00

TECSYS’s (TECSYS Stock Quote, Chart, News: TSX:TCS) second quarter results were in-line with Laurentian Bank Securities analyst Nick Agostino’s expectations, but the company’s cash position and operating leverage were lower than he had modeled.

On Tuesday, TECSYS reported its Q2, 2016 results. The company earned $367,000 on revenue of $15.8-million, a 16 per cent bump over 2015’s second quarter topline of $13.5-million.

“This quarter’s results begin to demonstrate the strong operating leverage we’ve built into our business model as our costs remained flat sequentially while total revenue has grown to record levels,” said CEO Peter Brereton. “With $13.4-million in contracts booked in the quarter, we’re pleased to see the benefits of our decision to increase our investment in sales and to strategically split the teams late last year. Contract bookings growth was fuelled by major wins in both our health care vertical and complex distribution, where we closed a large multiwarehouse deal with great potential for future site expansion, as well as a large well-known hospital network in the United States. Our growing pipeline, combined with strong bookings and robust order backlog, gives us great visibility into the second half of fiscal 2016 and confidence in our ability to continue to deliver solid results.”

Agostino says there were a number of positive takeaways from the quarter, including a growing IDN pipeline, a multi-million dollar Logi-D contract, and evidence that the company’s two-tiered sales model is beginning to reap rewards. But he says the company also faced some headwinds.

“Adjusted EBITDA of $1.2M below our $1.6M estimate but in line with consensus,” says Agostino. “While opex was flat QoQ we had assumed S&M to decline QoQ by +$250k associated with the FQ1 user conference expense (which occurs on an 18 month schedule), however TCS offset this savings with increased headcount, marketing, and travel expenditures in FQ2, and contributed to the EBITDA difference with our estimate. The strong F/X was also a hindrance to EBITDA, providing a $550k headwind. Despite this, TCS posted QoQ operating leverage (EBITDA margins at 7.4% up 170bps QoQ but below our 10.0% estimate due to the above) after 5 straight quarters of margins compression.”

In a research update to clients today, Agostino maintained his “Buy” rating on TECSYS, but lowered his one-year target price on the stock from $11.50 to $11.00, implying a return of 28.3 per cent at the time of publication.