Martello Technologies is still a pass, says Eight Captial

Christian Sgro of Eight Capital has muted his perspective on Martello Technologies (Martello Technologies Stock Quote, Charts, News, Analysts, Financials TSXV:MTLO), maintaining a “Neutral” rating while dropping his target price from $0.12/share to $0.10/share for a projected return of 67 per cent in an update to clients on Wednesday.

Ottawa-based Martello Technologies develops digital experience monitoring software solutions serving education, government, healthcare, professional services and remote work sectors, as well as service providers in Canada and internationally.

Sgro’s latest analysis comes after Martello Technologies reported its third quarter results for the 2022 fiscal year, which Sgro noted to be flat and just behind consensus estimates.

“We view the C$0.10 price as meaningful given insiders recently participated in a private round at this price, which was at a premium to market and demonstrates their continued support for and confidence in the business,” said Sgro, who noted his target price also takes 2023 revenue projections into account.

Martello’s results were headlined by $4.5 million in revenue, in line with Eight Capital estimates and slightly below the $4.7 million estimate set by the consensus. In total, 97 per cent of the company’s revenue was recurring, with 90 per cent gross margins.

Martello’s Microsoft DEM revenue continued to show growth at a four per cent sequential clip and it now represents 48 per cent of the company’s total revenue mix.

The company has been making moves as of late, having recently announced the addition of its Vantage Dx software on the Microsoft Azure marketplace, paired with the announcement that Martello has joined as a Global Managed Partner. As part of the partnership, Microsoft has demonstrated its commitment to Martello by introducing the company to six telecom and systems integrators, as well as five enterprise customers.

“Momentum continues to grow for our Vantage DX product, with more than half a million users trialing or having purchased the product, over half of which represent new potential customers for Martello which gives us confidence that Vantage DX meets market needs and is differentiated competitively”, said John Proctor, President and CEO of Martello in the company’s February 15 press release.

“We are also working with Microsoft to identify the partners in their ecosystem best positioned to bring Vantage DX to enterprises, in order to optimize their Microsoft Teams user experience, lowering their total cost of ownership and improving productivity. Though Martello’s performance over the last year has been challenging amidst longer sales cycles related to COVID-19 and efforts on the new product offering, this significant increase in commercial activity since the launch of Vantage DX is very encouraging,” Proctor said.

Meanwhile, the company reported an adjusted EBITDA loss of $800,000, which came in behind the $400,000 loss estimate set by both Eight Capital and the consensus.

With the new results now public, Sgro has made revisions to his future financial projections, as he now projects $17.8 million in revenue for a six per cent year-over-year increase to wrap up 2022 (previously $18 million and a 7.1 per cent year-over-year increase). Looking to 2023, Sgro lowered his revenue projection from $21.1 million to $20.5 million, with the new figure still implying a 14.9 per cent year-over-year increase.

“We decompose this as flat Mitel performance, stable growth in Microsoft 365 Monitoring, and slow growth in the Analytics segment which we expect is battling legacy churn,” Sgro said, while paying particular attention to lowered fourth quarter projections as part of his reduced 2022 forecast.

From a valuation perspective, Sgro forecasts the EV/Revenue multiple to drop from 1.5x in 2021 to a projected 1.4x in 2022, then drops it again to 1.2x in 2023.

Sgro also made revisions to his adjusted EBITDA forecasts, as he now projects a $3 million loss in 2022 (previously projected as a $2.1 million loss), with a change to a $2.6 million loss in 2023 compared to the $500,000 loss originally projected.

In terms of gross profit, Sgro forecasts $16.2 million and a 90.7 per cent margin in 2022 (previously $16.4 million and a 90.8 per cent margin), though the margin projection lowers to 89.4 per cent margin in 2023 with $18.3 million in gross profit, down from his initial $19 million projection and an 89.7 per cent margin.

Martello Technologies has seen its stock price tumble by 73.9 per cent over the last 12 months, with a 25 per cent loss already to start 2022. A year ago today was Martello’s 52-week high of $0.23/share, and it has gone down ever since, hitting a 52-week low of $0.05/share on January 25.