Martello Technologies is a buy, says Echelon Wealth

Martello Technologies Group (Martello Technologies Group Stock Quote, Chart, News TSXV:MTLO) is well-positioned in a high-margin, high-recurring revenue sector, says Echelon Wealth Partners analyst Gianluca Tucci, who on Monday launched coverage of the stock with a “Buy” recommendation and $0.55 price target, which at press time represented a projected 12-month return of 90 per cent.

Founded in 2009, Kanata, Ontario’s Martello develops products and services to optimize performance of real-time applications on cloud and enterprise networks. The company’s products, including SD-WAN technology, UC performance analytics and IT Operations analytics software all serve to give IT teams control and visibility of their IT infrastructure on one platform and one single pane of glass.

Martello has been the long-serving provider of UC performance analytics to Mitel’s channel of resellers and in January 2019, the company signed an amendment to its Mitel agreement which expanded coverage of Martello’s software to additional Mitel communications platforms and both extended renewal terms and increased the fee per user received by MTLO on certain Mitel offerings.

Tucci says the end user experience monitoring market is getting hotter, with the analyst quoting Gartner’s estimate that by 2023, 60 per cent of digital business initiatives will require infrastructure and operations to report on users’ digital experience, up from less than 15 per cent today.

“We believe large enterprises now have dozens of business-critical SaaS applications that require a digital experience monitoring (DEM) approach,” wrote Tucci in his coverage initiation. “As a result, DEM is relevant not just to IT organizations but also line of business teams that rent important SaaS applications, like Salesforce (CRM-US, NR) and others. The arrival of DEM is forcing the monitoring industry to have a more honest and mature assessment about the ascendancy of the internet and how much enterprise relies on it.”

There are a number of facets to Tucci’s investment thesis, with the analyst first off saying that MTLO’s agreement with Mitel still has lots of runway to it, as Martello is currently penetrated with less than 20 per cent of Mitel’s customer base. Secondly, Tucci points to Martello’s growth by acquisition strategy which he sees as a complement to its 12 to 20-per cent annual organic growth target. Third, Tucci likes Martello’s “systematic approach” to growing its high-recurring revenue moat, where over 90 per cent of revenue is classified as recurring. Fourth and finally, the analyst likes Martello’s international and highly diverse customer base which speaks to the value proposition that the company has for its clients.

Tucci also gives a nod to Martello’s “A-list Board,” which features Sir Terry Matthews and Bruce Linton as co-chairmen and Jennifer Camelon (formerly CFO at QNX) and Colley Clarke (former CFO at Descartes) as directors.

“We believe opportunity lies within a re-rating of MTLO against where its peers trade,” Tucci wrote. “MTLO currently trades at C2019/C2020 EV/Revenue of 3.7x/2.6x, respectively, versus its Networking Performance and Canadian Software/SaaS peer averages of 13.5x/10.3x and 10.6x/7.2x, respectively. We see the valuation gap narrowing with evidence of MTLO’s revenue momentum building and with successful acquisitions.”

“We weigh the outsized growth expectations for MTLO within the context of its lower liquidity and higher execution risk profile against its peers when we consider its prospects for narrowing the valuation gap. Recall, MTLO carries 90-per-cent-plus gross margins and over a 90 per cent recurring revenue moat today,” he said.

Tucci thinks that MTLO will generate fiscal 2020 revenue and adjusted EBITDA of $13.4 million and negative $3.2 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $16.2 million and negative $0.8 million, respectively.