Take a pass on Vecima Networks, says PI Financial

There’s light at the end of the tunnel for Vecima Networks (Vecima Networks Stock Quote, Chart, News TSX:VCM), according to analyst David Kwan of PI Financial.

In an earnings update to clients on Friday, Kwan reviewed the latest quarterly results from Vecima, saying the much-anticipated launch of its Entra platform should give a major boost to the company’s top line.

A data transmission company based in Victoria, BC, Vecima released its fourth quarter and fiscal 2019 year end financials on Thursday, reporting Q4 revenue of $20.7 million, down from $24.4 million a year prior, and adjusted EBITDA of $0.3 million, also down from $4.4 million in Q4 2018.

The company reported that it secured its first master purchase agreement covering Entra DAA products with a Tier 1 MSO and says that it’s in “various phases of lab and field trials” with Entra with a total of 16 Tier 1, 2 and 3 operators in North America, Central and Latin America, Europe and Asia.

“Fiscal 2019 was a year of concerted moves and important achievements as we broadly solidified our market position in preparation for the most profound transitions unfolding in the industry: DOCSIS Distributed Access Architecture (DAA) and IPTV,” said Sumit Kumar, Vecima’s President and CEO, in a press release.

Kwan says the $20.7-million in revenue came in below his $24.4-million estimate as did the $0.3 million in adjusted EBITDA in comparison to his $1.8-million estimate.

Drilling down, the analyst attributed the revenue miss to disappointing results from Vecima’s Video and Broadband Solutions segment (down 38 per cent year-over-year and 45 per cent sequentially). The company’s balance sheet remains strong, however, according to Kwan, who notes the negative $1.1 million in free cash flow and their $42.4 million in net cash at the end of the quarter.

Kwan says Entra is getting ready for primetime, noting the master purchase agreement with a Tier 1 operator.

“As one of two vendors selected, we estimate the revenue opportunity to VCM could reach ~$30 million/year,” the analyst said. “More DAA deployments could commence later this year and into FY21, with 16 MSOs worldwide (6 are Tier 1’s) engaged. VCM also indicated its lead MSO customer is pushing ahead with its Terrace IQ IPTV solution, with a commercial deployment possibly a FY20 event (but more likely FY21).”

All in all, Kwan calls the quarterly results “slightly positive” and has adjusted his fiscal 2020 forecast downward, now calling for $90.2 million in revenue (was $104.0 million) and $6.8 million in adjusted EBITDA (was $20.5 million).

Kwan is maintaining his “Neutral” rating on VCM but raising his target price from $9.40 to $9.80, representing a projected 12-month return of 7.7 per cent at the time of publication.

“While the Q4 miss was bad, the positive update on Entra has us the most optimistic we have been in a couple of years. That said, we would prefer to wait for more signs that a potential inflection point is indeed nearing before becoming more constructive on the stock,” writes Kwan.