The runway for growth for Martello Technologies (Martello Technologies Stock Quote, Chart, News TSXV:MTLO) looks great on a number of fronts, according to Paradigm Capital analyst Daniel Rosenberg, who delivered an update to clients on Thursday. After reviewing Martello’s latest quarterly results, Rosenberg kept his “Buy” rating and 12-month target of $0.70, which at press time represented a projected return of 211 per cent.
Ottawa-based Martello provides performance analytics software, used to troubleshoot voice quality issues on phone systems for Mitel as well as IT operations analytics and digital experience monitoring (DEM), with the latter coming about through the June 2020 acquisition of GSX, a Geneva-based provider of end-user experience monitoring for Microsoft Office 365 with over 400 enterprise customers around the world.
Martello reported fiscal second quarter 2021 financials on Tuesday, the first quarter to see a full impact of GSX and one which saw 63-per-cent year-over-year revenue growth to $4.4 million, with GSX contributing $1.73 million. Adjusted EBITDA came in at $0.3 million compared to a loss of $1.0 million a year earlier and the net loss was $0.9 million compared to a loss of $1.5 million a year ago. Cash and equivalents at the quarter’s end (September 30) was $4.17 million compared to $5.9 million at the end of the fiscal Q1.
In its quarterly comments, management said the company saw better bookings, revenue and renewals for its iQ service analytics solution and that its partnership with Mitel “remains strong,” with focus on growing Mitel’s Performance Analytics sales in a number of key Mitel offerings.
But the company appears laser-focused on its DEM business, with management planning on strengthening its sales pipeline and extending its addressable market.
“We continue to focus on the performance of our DEM strategy,” said president and CEO John Proctor in a press release. “While this long-term strategy requires investment over the next several quarters to increase future MRR, I’m pleased that just one quarter after acquiring GSX and enhancing our position in delivering DEM, momentum is growing. Microsoft 365 and Teams have become critical business services, and third parties such as Gartner are increasingly recognizing Martello as a key DEM vendor keeping these services performing reliably for users.”
For his part, Rosenberg said the Q2 numbers came in-line with expectations, where Martello’s revenue of $4.4 million was below the analyst’s $5.1-million forecast as well as the consensus call of $4.8 million, while the adjusted EBITDA loss of $0.3 million was in line with Rosenberg’s loss of $0.2 million and the Street’s $0.0 million.
Rosenberg said that EBITDA contraction is likely following the fiscal Q2 as Martello invests in its sales team but he is nonetheless predicting positive EBITDA growth on an annual basis ahead. He also sees the company’s balance sheet to be sufficient to support its cost structure.
On GSX, Rosenberg said the acquisition meant expanding beyond Martello’s historical base in small- to medium-sized business to GSX’s large enterprise customers. Rosenberg said Martello now has two million users of GSX’s Gizmo platform, having added over 450,000 Microsoft 365 users in just four months.
“We view Martello as an attractive way for investors to gain exposure to the high-growth Digital Experience Monitoring space,” Rosenberg said. “[The GSX] acquisition diversified and strengthened Martello’s capabilities as a provider of DEM solutions, and brought in timely exposure to the Microsoft tech stack by way of GSX’s Office 365 monitoring platform. Microsoft Teams saw tremendous user growth that outpaced all other collaboration tools during the pandemic (Figure 1). The two product suites are very complementary and should provide meaningful value to channel sales partners and their end customers.
Commenting of the DEM field, Rosenberg referred to a Gartner report that DEM is one of the top digital workplace trends on the Hype Cycle that CIOs will be paying attention to in the years to come.
“While likely a new term for most, we have all experienced the impacts of a poor-quality connection and the space warrants investor attention. Gartner forecasts that by 2023 60 per cent of digital business initiatives will require reporting on users’ digital experience, up from less than 15 per cent in 2019. Martello owns leading technology in this growing space,” Rosenberg said.
On the GSX acquisition, the analyst said shortly after Martello announced its $18.4-million purchase (which Rosenberg estimates at about 3x revenue), Cisco agreed to buy GSX competitor ThousandEyes for a reported US$1 billion, which he represents as roughly a 10x EV/Revenue valuation.
“We maintain our Buy recommendation and $0.70 target price (rounded from $0.66), based on a 7.5x multiple on FY22e sales,” Rosenberg wrote. “Martello trades at 3x our CY21 revenue estimates, while large-cap North American SaaS peers trade at 17x CY21e sales.”
“Martello is one of the few true SaaS companies in the small-cap space with ~90 per cent gross margins and ~90 per cent recurring revenue, and while the DEM market is still developing we believe cross-selling opportunities should lead to an improvement in growth and profitability and ultimately drive multiple expansion,” Rosenberg said.
Disclosure: Cantech Letter’s Nick Waddell owns shares of Martello