Martello keeps bullish target at Desjardins

Desjardins analyst Kevin Krishnaratne is still a “Hold” on Martello Technologies (Martello Technologies Stock Quote, Charts, News, Analysts, Financials TSXV:MTLO) after the company’s latest quarterly report. In an update to clients on Friday, Krishnaratne said the second half of the year could be promising with more customer wins for MTLO.

Ottawa-based Martello, which provides digital experience monitoring (DEM) solutions including analytics and experience monitoring, announced on Wednesday its financials for the fiscal first quarter 2022 for the period ended June 30, 2021. The company saw sales of $4.4 million compared to $3.3 million a year earlier and a net loww of $2.2 million compared to a loss of $2.1 million a year earlier. Adjusted EBITDA for the fiscal Q1 was negative $1.0 million compared to negative $200,000 a year earlier. By the end of the quarter, Martello’s cash and short-term investments balance was at $6.63 million compared to $8.52 million a quarter earlier. Net working capital was $3.11 million.

Martello said the uptick in revenue came from the acquisition of GSX which gave the company access to the Microsoft DEM market, while the company also experienced a drop in legacy product revenue along with a negative impact from FX conversion for its Monitoring — Mitel unified communications segment.

“Since acquiring GSX last year, our investments in integration, product and channel development have brought growth in Microsoft DEM revenue, making it Martello’s largest revenue stream this quarter for the first time in the Company’s history”, said John Proctor, President and CEO of Martello, in a press release. 

Martello also announced on Wednesday that it will be joining the Microsoft Global Solutions Alliance program as a Strategic Global Independent Software Vendor (GISV) Partner. Martello said the agreement will give it access to Microsoft’s customer and partner channels and it noted that it’s one of the only Microsoft 365 and Teams-focused DEM software vendors in the Global Solutions Alliance program.

“Joining Microsoft’s Global Solutions Alliance program partner tier as one of the only DEM vendors is both recognition of the value of our solutions and a game changer for the trajectory of our business. We are already optimistic about performance in the second half of fiscal 2022, due to fundamental investments to enable growth. The Microsoft Global Solutions Alliance Program improves our longer-term financial outlook,” Proctor said in the quarterly press release.

Looking at the Q1 numbers, Krishnaratne said they arrived as expected and were relatively stable compared to the fiscal fourth 2021.

“MTLO started FY22 with an in-line 1Q featuring six per cent quarter-on-quarter growth in its Microsoft DEM-based businesses, which now account for the largest source of sales (44 per cent of mix),” Krishnaratne wrote.

“It also announced that it joined a key MSFT Partner program, which looks promising as a channel through which to drive further DEM usage. Despite MTLO trading at 2.1x CY22 sales, we maintain our Hold as we await signs of an acceleration in pipeline build and DEM customer wins, which we believe could be more weighted to 2H and particularly 4Q,” he said.

Krishnaratne said MTLO has multiple opportunities for upside over the second half of the year and beyond, pointing to new products like Vantage and recently launched multi-tenant GSX which the analyst said should expand the company’s market opportunities. On the Microsoft channel and Global Solutions program, Krishnaratne called it quite promising for Martello and projected potential initial sales to start in the fourth quarter of this calendar year. 

“While our FY23 estimates are relatively unchanged, we see opportunities for upside given the large TAM (at least 250 million global Teams users) and will monitor progress over the coming months before becoming more constructive,” Krishnaratne said.

With the update and his maintained “Hold” rating, Krishnaratne has also maintained his $0.20 per share target price, which at the time of publication represented a projected one-year return of 66.7 per cent.

Looking ahead, Krishnaratne has rejigged his estimates for the fiscal 2022 and 2023 years and is now calling for 2022 and 2023 revenue of $19.2 million and $22.2 million, respectively, 2022 and 2023 gross profit of $17.3 million and $20.3 million, respectively, and for 2022 and 2023 adjusted EBITDA of negative $4.0 million and negative $2.1 million, respectively. 

On comps, Krishnaratne estimates Martello to be currently trading at 2.3x 2021 EV/Revenue and 2.1x 2022 EV/Revenue versus its SaaS peers at averages of 16.7x and 13.4x, respectively. On EV/Gross profit, the analyst sees MTLO to be trading at a 2.5x multiple of its 2021 estimates and at 2.3x its 2022 estimates versus its peer averages at 22.7x and 17.5x, respectively.

Martello’s share price has been flat to trending downward over the past couple of years, going from about $0.35 in September 2019 to about $0.20 in September 2020 to now between $0.10 and $0.15 per share.