PI cuts target on VersaPay due to spending concerns, keeps “Buy” rating

Following the company’s second quarter results, PI Financial analyst David Kwan has made a modest cut to his price target on VersaPay (Quote, Chart TSXV:VPY).

On Tuesday, VersaPay reported its Q2, 2018 results. The company lost $3.69-million on revenue of $1.14-million, a topline that was up 80.1 per cent over the same period last year.

“The second quarter was a landmark period for the company,” CEO Craig O’Neill said. “We signed 14 new clients representing $1-million in committed ARC ARR (annual recurring revenue) in the quarter, an increase of more than 40 per cent in total ARC ARR as these new clients come on line. We are extremely pleased, not only with this overall sales result, but with the mix of deals closed, with one-half from our direct sales efforts and one-half from our channel partners, and with the continued growth of our sales pipeline, which we expect will support similar sales results in future quarters.”

Kawn says this quarter fell below his expectations, and adds that the quarterly cash burn of approximately $3.5-million means the company may ultimately need to go back to the market to raise capital, something he says increases risk.

“We are reiterating our BUY recommendation, lowering our target to $3.25/sh (was $3.50/sh), and maintaining our SPECULATIVE risk rating,” Kwan says. “Our target price is based on our DCF valuation, which has been lowered due to the impact of increased spending and the expectation of a small equity raise. Revenue growth and other key top line metrics are starting to reaccelerate and we believe this trend can continue based on customers in the implementation pipeline (including some large ones), growth with existing customers, and the increasing contribution from its growing number of partnerships (eg., RBC and First Data). VPY has a robust pipeline of potential customers to drive future growth. However, investors should keep an eye on spending, as VPY has been aggressively hiring in recent quarters to drive future growth. That said, we remain bullish on the stock, with the recent weakness offering a nice entry point.”

Kwan thinks VPY will generate Adjusted EBITDA of negative $10.6-million on revenue of $5.1-million in fiscal 2018. In 2019, he expects those numbers will improve to EBITDA of negative $5.9-million on a topline f $12.6-million the following year.