TECSYS has big upside and limited downside, says Cantor Fitzgerald Canada

Cantor Fitzgerald Canada analyst Ralph Garcea says TECSYS (TSX:TCS) offers investors both growth and safety.
Yesterday, TECSYS reported its Q3, 2016 results. The company earned $543,000 on revenue of $15.6-million, a topline that was up 4 per cent over the same period last year.
“We were pleased to see that we grew recurring revenue by 19 per cent this quarter as it is a key driver to value creation,” said CEO Peter Brereton. “Our services revenue grew by 25 per cent primarily as a result of the strong backlog at the beginning of the quarter. We were also able to leverage our services organization, improving gross margin to 45 per cent compared with 35 per cent in the corresponding quarter of last year. While this was not a high-growth quarter from a revenue standpoint, we were in the final stages of a product build cycle, for which we have firm orders for our next-generation product line.
Brereton said the company is continuing its expansive ways.
“We have significantly ramped up our investment in sales and marketing over the last 18 months, he added. “We are satisfied with the progress being made with the larger team and expect to see this starting to impact our topline in the coming months. Our backlog hit a new record, and we have signed our largest IDN in our history during the quarter after signing another marquee name in Q2. This type of client represents great opportunity for further expansion of the business relationship.”
Garcea says he was impressed by the company’s growing backlog and its growth in recurring revenue. The analyst believes the added expenditures the company is currently taking on shouldn’t hamper its growth.
“TCS has significantly increased its investment in sales, marketing, and R&D in order to capitalize on the opportunity it sees in the IDN segment, he said. “However, costs should remain relatively flat at these levels going forward. As such, with sales cycles in the 12-24 months range, it will take longer to realize the operating leverage in the model.”
In a research update to clients today, Garcea maintained his “Buy” rating and one-year target price of $11.00 on TECSYS, implying a return of 59.4 per cent at the time of publication.
“We believe the downside risk is limited (and supported by the backlog and growing recurring revenue), as you wait for the IDN market to deliver the revenue growth and operating leverage,” said Garcea.