Espial Group has 64% upside, Mackie Research says

An increase in recurring revenue has analyst Nikhil Thadani of Mackie Research boosting his target price for Espial Group Inc. (Espial Group Stock Quote, Chart, News: TSX:ESP), which gets upgraded to a “Buy” and a one-year target price of $3.25.

Espial reported its fourth quarter results for the three-month period ended December 31, 2017, with revenue and adjusted EBITDA coming in at $10.2 million and $0.9 million, respectively, down from $12.8 million and $3.2 million for Q4 in 2016. At the same time, revenue for the year was up 17 per cent to $33.4 million from $28.6 million in 2016.

“This was our first quarter of Software-as-a-Service (SaaS) revenue since introducing our Elevate SaaS video platform in Q3,” said Jaison Dolvane, Espial’s CEO in a press release. “We are pleased with the early reception we have seen from service providers for this offering. We believe that Pay TV service providers need to continue to innovate and Espial’s Elevate platform helps them compete effectively with next generation TV services.”

Those fourth quarter numbers came in better than expected, says Thadani, who notes that 2018 is likely to be a transition year for the company.

“As with other software companies transitioning to a SaaS model, where some customers switch to subscription revenue, legacy license, support and professional services witness erosion,” says the analyst in an update to clients on Friday. “As subscription revenue is recognized over time, total near term revenue usually witnesses near term compression before new subscriptions kick in. That said, we expect ESP to exit 2019 with a SaaS ARR of ~$10 mln (or ~50% penetration in ~two years) vs. ~$4 mln in Q4/18.”

“With Q4 results, ESP has shown a path to ~$5 mln Annual Recurring Revenue (ARR), an important milestone we previously highlighted,” says the analyst.

“ESP’s recurring revenue growth profile, should, over time improve ESP’s valuation. That said, we recognize sentiment on this stock is not as exuberant as it once was,” he says. “Our target equates to ~4x 2019 recurring revenue plus ~1.5x license & professional services revenue (implying a blended ~2.7x sales) plus net cash a year out.”

Thadani rates Espial a “Buy” with a target price of $3.25 (up from $2.75), representing a 64 per cent projected return at the time of publication.