Redknee Solutions is poised to rebound after restructuring, says Canaccord Genuity

Transitional periods can be tough, especially when they involve a whole whack of downsizing, but for Toronto-based Redknee Solutions Inc. (Redknee Solutions Stock Quote, Chart, News: TSX:RKN), coming out of restructuring slimmer and more streamlined will make a world of difference, say analyst Robert Young and associate Christian Sgro with Canaccord Genuity, who have raised their target price on Redknee from $0.90 to $1.10.

This past week, Redknee, which produces subscriber management software for the telecommunications industry, released its Q1/F18 results, which featured a higher-than-expected revenue of $34.4 million as compared to the consensus estimate of $29.7 million. Those numbers are down 7.6 per cent year-on-year, but a return to profitability is on the horizon, say the analysts, whose report on Friday, February 9, maintains a “Hold” position on Redknee to go along with the revised target price of $1.10.

“We have retooled our estimates to reflect Q1 and the company’s gradual return to profitability following the transition,” say the analysts. “Our F2018 revenue estimates are increased modestly from $118.8M to $119.4M while F2019 is reduced from $135M to $126M given management outlook.”

The company’s restructuring involves a drastic reduction in workforce, going from 1,200 employees to a projected 600 and including the shutting down of 18 offices worldwide. Still in the midst of the downsizing, the company is taking on high costs of severance and office closures, which amounted to $47.0 million in FQ1 alone (previous projections were for restructuring costs to run at $48 to $50 million for the whole of 2018).

“The company has moved forward aggressively on a substantial restructuring to ultimately lower its cost base and drive increased margins,” say the analysts. “We see potential for churn from the changes, but management believes it can achieve its CFO breakeven target even when considering a scenario where revenue declines to ~$100M versus the $120M rough guidance.”

Redknee is currently trading at 2.3x C2018E EV/Sales compared to its peers in business support systems (BSS) at 3.2x, which the analysts see as appropriate for a company going through a transition period. The analysts estimate F2018 EDITDA and adjusted EPS of $(-12.4)M and $(-0.07) from $0.3M and $(-0.04), respectfully.

As part of the company’s restructuring, Redknee will be changing its name to Optiva, with the change to be finalized sometime in the Spring. Danielle Royston, CEO of Redknee says the new name will reflect the company’s new outlook and a more customer-focused approach, including a a customer satisfaction score to be called the Optiva Advantage.

“We are completely rebuilding Redknee from the ground up: starting with focusing on our customers’ success, we want to provide key business insights to our customers coupled with innovative products. To reinforce this transformation, we are thrilled to adopt a new name and visual identity,” said Royston in a press release. “The Optiva™ brand captures the vision and energy of our team, aligns with our strategic plan and catalyzes our future endeavours.”