Haywood cuts price target on Espial Group

Expect revenue for Espial Group (Espial Group Stock Quote, Chart, News: TSX:ESP) to be underwhelming over 2018, says analyst Pardeep S. Sangha of Haywood Securities, who believes that the cable and telecom software company’s ongoing transition to a SaaS model will eventually result in a more predictable and profitable model over the long-term. In an earnings report on Friday, the analyst maintained his “Buy” recommendation with a lowered target price of $2.90.

On Friday, Ottawa-based Espial Group reported its first quarter 2018 financials for the period ended March 31, which produced revenue of $5.9 million and an adj. EBITDA loss of $1.7 million, both of which missed consensus estimates. Investor response caused a ten per cent drop in the company’s share price on Friday.

“We continued to make good progress on our evolution to a SaaS software company. In Q1, we added new wins for our multi-tenant Elevate SaaS video platform and grew our recurring subscription revenue by 13 per cent on a sequential basis.,” said Jaison Dolvane, CEO, in a press release. “We also consolidated our global engineering operations to focus investments on next generation IP and cloud solutions, while reducing costs to improve profitability.”

Sangha thinks that Espial’s transition to a SaaS model will result short-term pain for longer-term gain.

“We are expecting revenue in CY18 to decline 20 per cent to $26.8 million, followed by 28 per cent revenue growth in CY19 to $34.4 million (previously CY18 revenue of $33.8 and CY19 revenue of $44.6 million). We are forecasting Adj. EBITDA loss of $1.1 million in CY17, followed positive Adj. EBITDA of $6.1 million in CY19. We are forecasting 18 per cent Adj. EBITDA margins in CY19 and we believe Espial could be generating EBITDA margins of over 20 per cent in CY20,” he writes.

The analyst says that growth in licensing revenue has slowed but that subscription revenue for the company’s Elevate platform should grow by ten to 15 per cent quarter over quarter, leading to Espial’s being EBITDA-positive by the second half of 2018.

“Espial continues to add new customers to its Elevate platform each quarter. The largest customer has 1 million subscribers (est. $10M annual recurring revenue) and the second largest is Eastlink (est. $4M annual recurring revenue). Full deployment or penetration into a service provider’s subscriber base can take 4 to 5 years,” he says.

Sangha says Espial will warrant higher valuation multiples as the company transitions to its SaaS model, with ESP currently trades at 1.2x EV/Revenue multiple of the analyst’s CY18 estimates, compared to its peer group average of 4.2x EV/Revenue multiple of CY18 consensus estimates.

The $2.90 price target (down from $3.50) represents an 81.3 per cent return as of publication date.

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