Martello Technologies is a bargain here, says PI Financial

Business is going well for Martello Technologies (Martello Technologies Stock Quote, Chart, News TSXV:MTLO) during the COVID-19 pandemic, says PI Financial analyst David Kwan, who on Monday delivered a corporate update in which he reasserted his “Buy” rating and $0.45 per share target on the stock.

Ottawa-based Martello offers digital experience monitoring (DEM) solutions for analyzing the performance of real-time applications on networks and gives control and visibility to a company’s full IT infrastructure.

Last week the company announced its fiscal fourth quarter 2020 results which featured quarterly revenue of $3.3 million versus $3.4 million a year earlier and a non-IFRS adjusted EBITDA loss of $150,000 versus a loss of $830,000 a year earlier.

For the fiscal year, Martello had $13.1 million in revenue compared to $10.4 million for fiscal 2019.
Martello was hit with a one-time, non-cash impairment charge of $3.4 million over the Q4 as a result of the company’s decision to divest itself of the SD-WAN and link balancing business so as to focus more fully on its DEM business.

Over the quarter, Martello completed its acquisition of Swiss-based GSX, a DEM vendor specializing in
Microsoft Office 365.

Last week, Kwan held a virtual marketing meeting with management following the Q4 results, a meeting which the analyst said was a positive for his estimation of the company and stock. Kwan noted in his update that MTLO’s business has seen increased customer interest and demand since the start of COVID-19 as companies strove to get their employees sorted in work-from-home environments.

Kwan thinks the GSX acquisition is helping Martello, not just in terms of the company’s existing base of business but also in terms of the rising demand for Microsoft Office 365.

“MTLO is poised to benefit from future strong demand for its MSFT Office 365 solutions (+34 per cent in FY19), which has already delivered a large U.S. enterprise win post-close (displaced a key competitor) and a potential key early cross-selling win (Gizmo/IQ) with a large global consulting firm,” Kwan wrote.
On GSX, Kwan also said that its Gizmo solution could be white-labelled by Martello, a potentially lucrative prospect.

“MTLO nearly generated positive Adj. EBITDA last quarter, after reporting elevated Adj. EBITDA losses over the prior year in part due to past increased investments for growth. With a larger revenue base and some cost rationalization, MTLO is set to return to positive Adj. EBITDA later this year, which when combined with the sharp re-acceleration in revenue growth ahead, could help serve as a key catalyst to help drive share price outperformance,” Kwan wrote.

The analyst thinks MTLO will generate fiscal 2021 revenue and adjusted EBITDA of $18.7 million and negative $0.7 million, respectively, and fiscal 2022 revenue and adjusted EBITDA of $25.5 million and $2.1 million, respectively.

At its current price, Kwan is calling MTLO a bargain buy.

“With a sharp re-acceleration in revenue growth and a return to positive Adj. EBITDA set to playout in the coming quarters, we believe the stock looks very attractive at current levels, especially given the compelling valuation of just 2.5x EV/Sales (CY21e), at a big discount to the peer group at ~7x, and 3.6x EV/ARR (pro forma GSX), well below the apparent ~10x multiple Cisco agreed to buy its key competitor ThousandEyes just one and a half months ago,” he said.

At press time, Kwan’s $0.45 target represented a projected return of 114 per cent.