BSM Technologies is undervalued, says Clarus

A better than expected quarter has Clarus Securities analyst Noel Atkinson Feeling bullish about BSM Technologies (BSM Technologies Stock Quote, Chart, News:  TSXV:GPS).

Last Friday, BSM reported its Q1, 2016 results. The company lost $505,000 on revenue of $15.7-million, a 99 per cent top line bump over the $7.9-million the company reported in last year’s first quarter, owing much to the company’s acquisition of Vancouver’s Webtech Wireless, announced last July.

“To date, we have achieved approximately $3.5-million in annualized cost synergies resulting from the acquisition of Webtech,” said CEO Aly Rahemtulla. “We realized approximately $500,000 in acquisition related synergies in our first quarter of fiscal 2016 and we anticipate realizing approximately $700,000 in the second quarter of fiscal 2016. Based on our progress to date, we continue to believe that we remain on track to achieve $4.0[-million] to $5.0-million in synergies by the second half of our fiscal 2017. In addition to integrating our businesses, we completed two sizable customer implementations. The combined impact of these items drove strong results across all of our key financial metrics for the quarter,” said Aly Rahemtulla, BSM’s president and chief executive officer. “As we move through the remainder of fiscal 2016, our efforts to integrate BSM and Webtech will position us to capitalize on an expanded product, offering a larger vertically focused sales team and enhanced research and development capabilities to fuel accelerated growth.”

Atkinson says BSM’s first quarter exceeded his forecasts for both revenue and Adjusted EBITDA. The analyst says the company achieved a key benchmark with these results.

“BSM reached a critical milestone for its business in Q1 by achieving sufficient recurring revenue to cover both the cost of subscription revenue and all cash operating expenses of the entire Company,” he says. “We call this subscriber “critical mass” because it allows BSM to discount its hardware to as low as 0% gross margin and still achieve positive Adjusted EBITDA. Companies that have subscriber critical mass enjoy a substantial competitive advantage versus their smaller peers. Smaller companies have to rely on profits from hardware sales and are therefore unable to match the potential discounting of the “critical mass” firms for an extended period of time. We saw this from BSM before the merger; management was targeting an increase in hardware gross margin after its recent redesign of the Sentinel transmitter and outsourcing its production resulted in a lower average production cost, rather than taking that extra profit and using it as extra potential discounts to customers. Investors place a much higher value on recurring, high-margin subscription revenue rather than hardware revenue, so we think BSM is now positioned to compete even harder and accelerate its subscriber growth into FY2017.”

In a research update to clients today, Atkinson maintained his “Buy” rating and one-year target price of $2.00 on BSM Technologies, implying a return of 124.7 per cent at the time of publication.

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