VersaPay’s fundamentals are improving, PI Financial says

A strong start to the year for Canadian fintech company VersaPay (VersaPay Stock Quote, Chart TSXV:VPY) has analyst David Kwan of PI Financial staying bullish on the stock. In an earnings update to clients on Monday, Kwan reiterated his “Buy” rating and $2.30 target price, which represented a projected return of 53 per cent at the time of publication.

Toronto-based VersaPay released its first quarter fiscal 2019 results last Wednesday, with the company sporting a 90 per cent year-over-year increase in revenue. CEO Craig O’Neill says that the biggest driver was the growth in revenue from its ARC accounts receivable platform.

“Our recurring business (ARR) is approximately $6.56 million at the end of the quarter with ARC representing approximately 70 per cent of this figure. This is significant because of the positive impact it has on our gross margins, which grew to 79 per cent this quarter, up from 71 per cent in Q1 2018,” said O’Neill in a press release.

Kwan says that the company’s $2.0 million in quarterly revenue beat his estimate of $1.6 million and the consensus at $1.7 million, while its Adj. EBITDA loss of $2.0 million was also better than his negative $2.2 million estimate and the street’s negative $2.4 million.

“The underlying fundamentals of the business continue to strengthen, driven by the growth in key revenue metrics and a narrowing of the cash burn, and we expect these trends to continue. The Company is also actively pursuing growth through new (and large) channel partnerships, with potential related announcements expected in the near-term serving as key catalysts that could help drive the stock higher,” says Kwan, who overall rates the quarterly results as having a positive impact on the stock.

The analyst notes that VPY’s free cash flow was negative $2.5 million, while the company ended the quarter with $8.6 million in cash, down from $11.0 million in Q4.

VersaPay has announced an agreement signed with a large global fintech company, with a formal press release coming soon. Kwan says that the press release, especially if it includes the identity of the partner, would be a significant catalyst for the stock.

“We have tempered our revenue forecasts to reflect a (temporary) slowdown in growth coming from channel partners, particularly given the strong Q1 performance,” says Kwan.

The analyst is calling for fiscal 2019 revenue and EBITDA of $9.1 million (was $9.6 million) and negative $7.0 million (was negative $6.9 million), respectively.