Tecsys retains Buy rating with Laurentian Bank

Impressive growth across its SaaS and Healthcare segments has analyst Nick Agostino of Laurentian Bank Securities staying bullish on Canadian enterprise software company Tecsys (Tecsys Stock Quote, Charts, News, Analysts, Financials TSX:TCS). Agostino reviewed the company’s latest quarterly financials in an update to clients on Friday where he maintained a “Buy” rating on the stock.

Founded in 1983, Montreal-based Tecsys has supply chain management software for distribution, warehousing and transportation logistics. The company reported its first quarter fiscal 2023 numbers on Thursday for the period ended July 31, 2022, featuring sales of $32.2 million, up slightly from $33.2 million a year earlier. Adjusted EBITDA was down 40 per cent year-over-year to $1.5 million.

In his quarterly comments, President and CEO Peter Brereton said the macro environment for supply chain software is becoming more robust.

“We are pleased to report a very strong start to Fiscal 2023. Our solid bookings for the quarter span our vertical markets and included three new hospital networks. We believe this serves as a testament that our SaaS solution suite is well-suited to the demands of a market ripe for transformation,” said Brereton in a press release.

Breaking down the Q1 topline, Tecsys generated $8.0 million from its SaaS business, good for a 42 per cent year-over-year jump, while Maintenance and Support revenue was $8.3 million, down one per cent from a year earlier. Professional Services revenue was up four per cent to $13.6 million and License and Hardware was down 33 per cent to $4.3 million.

“Our SaaS ARR bookings are up 256 per cent over last year, which translates into a positive impact on RPO up 58 per cent year over year,” said CFO Mark Bentler in a press release. “As we continue to see rapid growth in bookings and RPO, we continue to invest in cloud infrastructure, R&D, and Sales and marketing to take advantage of this evolving market opportunity.”

Agostino said Tecsys’ Q1 topline of $34.2 was in line with his estimate at $32.4 million as well as the consensus at $34.1 million, while the adjusted EBITDA of $1.5 million was also close to Laurentian Bank’s forecast of $1.8 million and the Street’s $1.6 million. Agostino said adjusted earnings were slightly impacted by higher foreign exchange, along with a lower gross margin and higher operating expenses compared to a year earlier. 

“For FQ2, TCS expects R&D expense to be slightly higher, however, expects a more notable increase in S&M expense due to seasonal spend and travel,” Agostino wrote. “As a validation of the growth investment and resulting depressed EBITDA, it is worth noting that some new deals in FQ1 came from new sales hires within the last year, showing an immediate top-line payback.”

“Given the strong SaaS and ARR growth rates exhibited this quarter (42 per cent and 21 per cent year-over-year, respectively), TCS is comfortable maintaining its growth investment initiatives, as are we, and expects EBITDA margins to remain depressed in and around the current levels for the near-term,” he said.

Agostino noted that the company’s backlog was up 32 per cent year-over-year to $135.3 million, with SaaS bookings up 256 per cent to $3.9 million, with quarterly lumpiness due especially to three new deal closings and legal and procurement bottlenecks from a year earlier. 

The analyst said TCS’s balance sheet is staying in good shape with net cash of $28.8 million, leaving the company plenty of dry powder to hit the M&A trail.

“The company is seeing private market valuation expectations starting to moderate as they play catch-up to the public markets. TCS covets acquisitions in Western Europe and with healthcare assets in North America, and this includes adding software automation capabilities, similar to its prior OrderDynamics acquisition,” Agostino wrote.

Looking ahead, Agostino said he has lowered his sales estimates to reflect a lower License segment rate and lower near-term Hardware revenues due to supply chain constraints, but he expects a recovery as the company exists its fiscal 2023. 

Agostino is calling for full fiscal 2023 sales of $141.3 million compared to $137.2 million for 2022 and rising to $160.0 million for fiscal 2024. EBITDA is expected to go from $10.5 million in fiscal 2022 to $6.4 million in 2023 to $13.4 million in fiscal 2024.

With a market cap just under $500 million, Tecsys’ share price has tumbled 42 per cent over the past 12 months and has a year-to-date return of about negative 38 per cent. Agostino sees upside over the next 12 months and has maintained a target price of $40.00 for TCS, which at the time of publication represented a projected one-year return of 17.2 per cent.

“While FQ1 sales were in-line and EBITDA/margins were depressed, looking under the hood we saw strong SaaS key performance indicator momentum (sales, bookings, backlog) which reconfirm strong Healthcare demand, along with growing Complex Distribution gains,” Agostino wrote.

“[I]n other words, solid market fundamentals, which reconfirm our investment thesis. Furthermore, we view lower Professional Services revenues/increased systems integration engagement favourably as it equates to quicker (SaaS) sales recognition and leads to higher overall margins long-term (SaaS GMs >60 per cent) and this should drive valuation multiple expansion overtime,” he said.