Take a pass on Vecima Networks, PI Financial says

Fourth quarter revenue for Vecima Networks Inc (Vecima Networks Stock Quote, Chart TSX:VCM) was up due to recent software acquisition Concurrent, but the rest of the company is still struggling, says David Kwan of PI Financial. Kwan’s Friday earnings update maintains his “Neutral” rating for VCM with the lowered target of $9.50 (previously $10.00).

Victoria, BC’s Vecima Networks reported its fiscal fourth quarter and year ended June 30, 2018, showing revenue growth of nine per cent to $78.1 million and adjusted EBITDA of $14.5 million for the year. For Q4, the company generated $24.4 million in revenue and an adjusted EBITDA of $4.4 million, representing an 80 per cent increase year-over-year.

"Fiscal 2018 was a year of expansion and broad strategic progress for Vecima," said Sumit Kumar, Vecima Networks' President and CEO. "The addition of the Concurrent business has further enhanced Vecima with a complementary and more diversified product portfolio as well as broader market reach. After a smooth integration, the operations are fully meeting our expectations with all product lines enjoying strong market momentum.”

Kwan calls it another “solid” quarter for VCM, with revenue slightly below expectations but adjusted EBITDA that came in ahead. But he points to the company’s legacy Video & Broadband Solutions business as evidence of continued struggles, where revenue was down 18 per cent year-over-year and down nine per cent from Q3.

“We have taken down our fiscal 2019 estimates to $98.7 million in revenue (was $116.4 million) and $11.1 million in adjusted EBITDA (was $18.1 million), with the decrease driven by a more conservative ramp from Entra and lower DVAP revenues, as its Tier 1 customer has changed its deployment plans,” says Kwan.

“We believe it will take at least a few more quarters to better assess the revenue opportunity and trajectory for Entra, which is the key reason to buy the stock in our view,” he says. “When combined with a lacklustre organic growth profile over the same time frame, we believe the stock is likely to remain range-bound for at least the next couple of quarters.”

Kwan’s $9.50 target is based on an average of 1.4x his 2019 Sales estimate and his net asset value. At the time of publication, the target represents a 2.4 per cent return on investment.