PI cuts price target on Martello Technologies

Network solutions company Martello Technologies (Martello Technologies Stock Quote, Chart, News TSXV:MTLO) came up with in-line results for its latest quarter, according to PI Financial analyst David Kwan, who reviewed the company’s fiscal Q3 in an update to clients on Thursday.

Ottawa-based Martello delivered its third quarter fiscal 2020 financials on Wednesday, showing revenue up nine per cent year-over-year to $3.4 million, with the recurring portion of that revenue being 88 per cent for the quarter compared to 75 per cent a year earlier. Adjusted EBITDA was a loss of $0.8 million compared to a $0.3-million loss a year ago and the loss from operations was $1.4 million compared to $1.3 million last year.

Management said that the drops in EBITDA and loss from operations were the result of investments in sales, marketing and support services. The quarter, which ended December 31, 2019, saw Martello win significant deals, according to management, including from a multi-billion dollar global media and telecom company, a municipal government of one of the largest counties in the US and a US energy company serving over a million customers.

“I’m pleased that as Martello’s investments in developing our growth platform near completion, recurring revenue remains strong and adjusted EBITDA loss has decreased quarter over quarter,” said John Proctor, Martello’s President and CEO, in a press release.

“We now have a solid foundation from which to accelerate recurring revenue growth with the development of digital experience monitoring and optimization solutions, to address what we believe is a significant future growth market for Martello.”

For his part, Kwan called the impact of the quarterly results as “neutral,” saying the Q3 revenue and earnings of $3.4 million and negative $0.8 million were comparable to his $3.5 million and negative $0.8 million estimates (consensus forecasts were for $3.3 million and $0.9 million, respectively).

Kwan called the revenue growth modest due to lumpiness in non-recurring revenue, which represented 12 per cent of total revenues. At the same time, the analyst noted that MTLO’s balance sheet looks healthy at negative $2.4 million in free cash flow and $2.8 million in net cash at the quarter’s end, down from $5.5 million at the end of the previous quarter.

“MTLO indicated it has enough cash to fund organic growth over the next year,” said Kwan in his report. “We believe they could also make a small tuck-in acquisition but a more sizable acquisition would likely need more capital (or a large stock component in the acquisition cost).”

“MTLO’s co-sell programs with Paessler and Microsoft should start supporting revenue in the coming quarters (e.g., Paessler will still start offering IQ with their products as of April 1st),” Kwan said.

Looking ahead, Kwan has trimmed his forecast due to a slower timeline for the release of Martello’s integrated solutions across its recent acquisitions, which results in a delay in cross-selling opportunities. The analyst is now calling for fiscal 2020 revenue of $13.3 million (was $13.7 million) and adjusted EBITDA of negative $3.1 million (was negative $2.9 million).

With his report, Kwan reiterated his “Buy” rating with the new target price of $0.45 (previously $0.55), which at press time represented a projected 12-month return of 80 per cent.