Martello Technologies: this tech junior still has upside, says PI

Performance analytics software company Martello Technologies ( Martello Technologies Stock Quote, Chart, News TSXV:MTLO) is off to a good start in its new fiscal year, says PI Financial analyst David Kwan, who reviewed the company’s first quarter 2020 results in an earnings update to clients on Wednesday.

Ottawa-based Martello, which develops products and solutions to manage the performance of real-time applications on networks, released its fiscal Q1 on Wednesday. The company showed revenue of $3.3 million, a 72-per-cent jump in revenue year-over-year, gross margin as a percentage of revenue at 92.7 per cent compared to 93.5 per cent a year earlier, loss from operations of $963,000 compared to a loss of $763,000 a year earlier and an adjusted EBITDA loss of $0.5 million compared to a loss of $0.2 million a year ago.

Management said the increased loss from operations and adjusted EBITDA loss were due to investments in sales, sales operations, marketing and support systems and new systems, all in aid of creating a strong platform which is built for future acquisitions, Martello said.

“Martello is a solid investment grade technology company with significant upside and a trusted technology platform from which to grow,” said John Proctor, President and CEO, in a press release. “Strong recurring revenues and exceptional gross margins offer stability and predictability, while our global client base and expanding portfolio of products brings diversity to our business model. This stability and diversity can offer downside protection in a volatile market.”

In his review, Kwan noted the company’s high margin recurring revenue of $2.9 million, up 86 per cent year-over-year and nine per cent over the previous quarter, and pointed out that the company’s balance sheet remains healthy, with free cash flow of $0.3 million and ending the quarter with net cash of $2.8 million.

The analyst says the company’s top line came in-line with his $3.4 million estimate while its adjusted EBITDA was a beat of his negative $0.7 million estimate. In total, Martello’s quarterly EPS of $0.00 per share ended up better than Kwan’s negative $0.01 estimate.

“MTLO continues to generate strong organic growth that is poised to improve in the coming quarters as the Company and its channel partners execute on the abundant cross-selling opportunities from the Savision (and Elfiq) acquisitions and continued penetration of the Mitel customer base,” says Kwan. “An active and disciplined M&A strategy should further augment MTLO’s robust growth profile while enabling the Company to better leverage past investments for growth leading to an improved profitability picture.”

Kwan says that given the company’s investments in personnel and systems over the last year, he expects profitability levels to improve at a faster rate than future revenue growth.

The analyst is maintaining his “Buy” rating and $0.50 per share target price, which represents a projected return of 25 per cent at the time of publication.

Going forward, Kwan thinks that MTLO will generate fiscal 2020 revenue and adjusted EBITDA of $14.9 million and negative $1.9 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $19.0 million and $0.4 million, respectively.