D-Box Technologies has tons of upside, says Echelon Wealth

The company’s Theatre and Entertainment segment underperformed but there are promising indications from D-Box Technologies (D-Box Technologies Stock Quote, Chart, News TSX:DBO) Simulation business, says Echelon Wealth Partners analyst Rob Goff, who delivered an update to clients on Wednesday where he reviewed D-Box’s latest quarterly earnings.

Montreal-based D-Box Technologies on November 14 released its second quarter results for the period ended September 30, 2019, featuring total revenues of $6.3 million, down from $8.1 million a year ago, and adjusted EBITDA of $0.1 million, which was the same as last year’s Q2 at $0.1 million.

D-Box CEO Claude McMaster said the Q2 results were lower than expected due to a number of factors including constrained capital expenditures within existing customers, international economic uncertainty and a lack of large project deals.

“Diversification of our revenue stream remains key to our strategic plan as we expect Commercial Entertainment and Simulation & Training revenues to grow at a faster rate than our theatrical business,” wrote McMaster in a press release.

“Going forward, the focus will be on the commercialization of new products, execution of strategic partnerships as well as enhancing our focus on profitability starting in fiscal year 2021. I am optimistic that these initiatives will pave the way to significant value creation for our shareholders,” he writes.

Goff called the second quarter a tough one for D-Box, whose consolidated revenue and EBITDA were lower than his estimates of $8.5 million and $0.3 million. The analyst noted that D-Box’s adjusted EBITDA margin improved, albeit marginally, by 20 bps to 1.8 per cent versus 1.6 per cent a year ago. Goff expects the company’s revenues to be lumpy on a quarter to quarter basis but that cost control measures put in place will ensure consistently positive EBITDA levels.

But trend-wise, Goff is positive on the name, saying that with box office revenues currently (and for the foreseeable future) challenged by secular competition and with revenues increasingly hit-driven, theatre companies are motivated to increase revenues per patron, hence making D-Box’s solution a strong differentiator on both patron yields and overall attendance.

“We are bullish on the long-term potential of D-BOX’s technology and high-quality client base both in the Entertainment and Simulation segments. While the Company deserves credit for its financial discipline as it manages growth investments to maintain positive EBITDA, we look for stronger revenue momentum to be rewarded by a coincident positive revaluation,” writes Goff.

The analyst adds, “Nevertheless, it is difficult to predict the seats’ order size from OEMs like John Deere and Caterpillar Inc in a particular quarter, making it difficult to predict the revenue for the simulation and training segment where we are conservative in our forecast and ~7 per cent y/y growth for F2020.”

“There is an upside to our forecast considering that D- BOX is the only motion technology partner for the major OEMs. These OEMs order in advance and new orders would depend only on the existing inventory at the OEM side that can not be anticipated,” he writes.

With the update, Goff is maintaining his “Speculative Buy” rating and $0.25 per share price target which at the time of publication represented a projected return of 127 per cent.