Redknee still a buy despite soft Q2, says Cantor Fitzgerald Canada

A weaker than expected second quarter isn’t changing Cantor Fitzgerald analyst Ralph Garcea’s bullish view of Redknee’s (Redknee Stock Quote, Chart, News: TSX:RKN) prospects.

Yesterday, shares of Redknee fell sharply after the company announced preliminary second quarter results that said it would post an Adjusted EBITDA loss of $1.5-million to $3.0-million on revenue of between $39.0-million and $41.0-million. The street consensus had the company posting EBITDA of $5.2-million on revenue of $50-million.

“We are disappointed by the preliminary second quarter results, which came in below our internal expectations as delays in customer purchasing decisions continue to impact our software licence revenue in the short term,” said CEO Lucas Skoczkowski. “We continue to be encouraged by the growth of our order backlog, which has reached record levels. Contributing to this growth in backlog is our $15-million contract win with a Tier 1 Asia-Pacific operator in which we displaced a competitor, as well as other multimillion contracts for our software and services. We expect to see growth in revenues in the coming quarters, as backlog translates into revenue. Our solutions remain critical to our customers’ ability to maximize the value of their networks. We are making good progress on the restructuring program stemming from our acquisitions and remain focused on maximizing our profitability and cash generation.”

Redknee softened the blow of reduced Q2 expectations by simultaneously announcing that it had won a $15-million software and services contract with an unnamed client it described as a “Tier 1 Asia-Pacific service provider”.

Garcea says he is focused on Redknee’s order backlog, which he says is trending in the right direction. He says the company just needs a little more time to implement operational efficiencies and to fulfill management’s assertion that it can turn its hefty backlog into revenue with margin expansion.

“Management achieved its strategic priorities in F2015 and closed the Orga Systems acquisition which should help drive improvements in margins and cash flow,” says Garcea. “Orga integration is substantially completed and annual cost savings of $20M-$25M are to be realized by the end of F2017.”

In a research update to clients today, Garcea maintained his “Buy” rating and one-year price target of $5.00, implying a return of 172 per cent at the time of publication.

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