Espial’s transition to a SaaS model will pay off, Haywood says

It might take a little more pain, but Espial (TSX:ESP) is on the right track with its transition to a SaaS model, Haywood Securities analyst Pardeep Sangha says.

On Tuesday, Espial reported its Q2, 2018 results. The company lost $484,468 on revenue of $7.0-million, a topline that was down 10.1 per cent over the same period last year.

“We are pleased with our financial performance this quarter. We improved EBITDA to just under break-even in Q2 from a loss of $1.7 million in Q1. Our revenue increased 18% in Q2 to $7.0 million, from $5.9 million last quarter,” CEO Jaison Dolvane said. “In addition, we signed several new Elevate SaaS video platform customers in the quarter that will contribute to continued growth in our annual recurring SaaS revenue. We also demonstrated good progress on our SaaS initiatives. Our App-based TV and IPTV software for set-tops, mobile and consumer devices continue to garner strong market interest. Consumers increasingly want to watch TV on their own terms, and are looking for new service options like skinny bundles, a la carte channels and more. Our products provide Pay TV operators with the ability to address such needs, while providing various capabilities to grow revenues and retain their subscribers.”

Sangha notes that ESP’s revenue and EBITDA figures for this quarter beat both his and the consensus estimates.

“Recent restructuring and cost reductions benefitted the Company’s EBITDA and cash flow,” Sangha says. “Espial’s transition to a SaaS model is proceeding as planned, and will result in revenue declining in CY18, but with higher recurring revenue and improved profitability.”

In a research update to clients today, Sangha maintained his “Buy” rating and one-year price target of $2.90 on Espial, implying a return of 94.6 per cent at the time of publication.

The analyst thinks Espial will post an Adjusted EBITDA loss of $1.6-million on revenue of $27.2-million in fiscal 2018. He expects those numbers will improve to EBITDA of positive $5.8-million on a topline of $34.2-million the following year.

Sangha says he will be looking for four catalysts in the near term.

“1) Ramping up SaaS revenue from Elevate in CY18 and CY19; 2) Selling additional licenses to NOS and Tele Columbus in CY18; 3) Announcing Elevate and G4 customer wins in the coming months; and 4) Achieving Adj. EBITDA positive in the second half of CY18,” the analyst says.