Eight Capital analyst Christian Sgro is staying bullish on Martello Technologies Group (Martello Technologies Group Stock Quote, Chart, News, Analysts, Financials TSXV:MTLO), saying in an update to clients on Wednesday that the stock could re-rate higher on topline growth.
Ottawa-based Martello is a developer of enterprise Digital Experience Monitoring (DEM) solutions that monitor and provide analytics in areas such as unified communications performance, Microsoft 365 user experience and IT services.
The company announced on Wednesday the launch of its channel partner program, which allows managed service providers (MSPs) and value-added resellers (VARs) to support small and medium-sized enterprises through Martello’s DME platform for Microsoft 365 and Microsoft Teams.
Martello says there are over a million enterprises using Microsoft 365 globally and, according to Gartner, about half of them will be using a third-party software tool to monitor the Microsoft 365 experience, up from just ten per cent in 2020.
“We’ve built a partner program that will give any Microsoft partner a simple and cost-effective path to revenue from value-added digital experience monitoring and optimization services,” said Mike Danforth, VP global sales and partnerships at Martello, in a press release.
“The small and medium enterprises who rely on these trusted advisors can now achieve the benefits enjoyed by large enterprises using Martello DEM to reduce downtime, improve employee productivity and maximize their return on the Microsoft 365 investment,” Danforth said.
With the press release, Martello announced a partnership with managed IT services company LDI, which has 7,000 clients and works in over 30 states as a provider in the supply, sale and service of digital office solutions.
Commenting on the news, Sgro judged its impact on MTLO as “slightly positive,” saying it helps clear up the runway ahead for the company and that the partner program creates a cost-effective way for Martello to expand its platform to new end-users via shared economics with motivated partners.
“Martello is executing on its plan for F2022, first launching a multi-tenant Microsoft 365 monitoring platform (link) which enabled MSPs to manage smaller-scale clients, and now delivering on the formal program launch. This announcement increases our confidence in Martello’s top-line growth and opens Martello’s addressable market. We believe Martello’s 3.2M Microsoft 365 user guidance for March 2022 is conservative,” Sgro wrote.
On the LDI partnership, Sgro estimates its clients consist of about 1.6 million end-users at the mid-point and, assuming less than half are serviceable Microsoft 365 users for the Martello platform and at a pricing of $2 per user per year, this suggests about $1.5 in gross revenue from the partnership.
“Considering shared economics with partners and terms of the agreement, we believe the ultimate ARR opportunity with LDI is $0.5 million – $1.0 million,” Sgro said.
“We expect a stable cadence of MSP and VAR adds through 2021 as the partners join the program. We think guidance is conservative. Even a modest penetration of LDI’s base suggests a meaningful contribution to Martello’s recently communicated 2.17 million Microsoft users, and further supports the company’s goal of achieving 3.2 million end-users by March 2022,” Sgro said.
With the update, Sgro has maintained his “Buy” rating and $0.40 target price, which stems from a 6.0x multiple of his 2022 EV/Revenue estimate and, at the time of publication, represented a projected one-year return of 135.3 per cent.
“Martello currently trades at 2.3x C2022E EV/Revenue, compared to North American SaaS peers broadly above 8.0x,” Sgro wrote. “Continued execution on Microsoft DEM growth will be a catalyst for an upward valuation re-rating.”
Martello last reported its financials in mid-February where its fiscal third quarter 2021 (ended December 31, 2020) featured revenue of $4.6 million, up 61 per cent from a year earlier, and an adjusted EBITDA loss of $0.26 million compared to a loss of $0.84 million a year earlier. Monthly recurring revenue hit $1.5 million for the fiscal Q3, up 64 per cent from the same quarter the previous year, excluding its discontinued NPM segment.
Operationally, Martello completed the integration of recent acquisition GSX over the fiscal third along with hitting 2.17 million Microsoft users on its platform by the close of the quarter. The company is targeting a 60-per-cent increase in that number by the end of fiscal 2022.
“As Martello completed the integration of GSX, we saw growth in our Microsoft DEM business in the third quarter of fiscal 2021 and we continued to generate high margin recurring revenue,” said John Proctor, President and CEO, in a February 17, 2021, press release.
“With more than two million Microsoft users relying upon Martello DEM in Q3 FY21 to stay productive whether at home or the office, we are making product investments to address the IT challenges of remote work. These investments, as well as those to enhance product scalability, are expected to create valuable competitive differentiators for Martello and access to new indirect sales channels for our DEM solutions,” Proctor said.
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