mCloud Technologies has a big upside, says ATB Capital

Changes are afoot for cloud technology solutions company mCloud Technologies (mCloud Technologies Stock Quote, Charts, News, Analysts, Financials TSXV:MCLD), as it looks to pivot out of low-margin businesses and enters a strategic partnership with Google Cloud. In a Flash Note to clients on Tuesday, ATB Capital Markets analyst Martin Toner took a look at mCloud’s latest quarterly numbers, saying he’ll be waiting for the results of the remodelling going forward.

mCloud is a critical energy infrastructure company that has cloud-based asset management solutions for businesses in energy-related industries. The company posted third quarter 2022 revenue of $2.9 million compared to $7.4 million a year earlier and operating EBITDA of negative $7.7 million compared to negative $2.8 million a year earlier. The drop in revenue came from the company’s decision to halt all customer activities not tied to its Google Cloud business, as it moved to phase out legacy infrastructure and migrate customers to its AssetCare platform now on Google Cloud.

“While the strategic decision to globally align mCloud’s go-to-market with Google Cloud will influence near-term results, mCloud sees ongoing growth of long-term monthly recurring revenues,” said President and CEO Russ McMeekin in a press release on Tuesay.

“Q3 2022 performance is the direct result of decisions and actions taken in the quarter to rationalize the business and to commit the Company’s resources fully on achieving targeted cloud-based recurring revenue growth through the delivery of AssetCare solutions. In the context of our integration and partnership with Google Cloud, these actions have level-set the organization and put mCloud on a trajectory toward profitability,” he said.

Looking at the results, Toner said the $2.9 million topline was under his estimate at $14.2 million and the consensus call of $7.3 million, while the operating EBITDA loss of $7.7 million was also larger than his estimate at negative $2.0 million and the Street’s at negative $3.5 million.

Toner noted that mCloud has discontinued reporting of its connected assets, citing confidentiality obligations through its Google Cloud agreement, and is now reporting average monthly recurring revenue instead. Toner also pointed to management’s guidance which said that the upcoming fourth quarter will feature significantly lower direct expenses as well as cost structure improvements.

“The Company’s partnership with Google creates a significant change to its business model. We will evaluate how quickly it will translate to revenue and look for evidence it accelerates its path to profitability,” Toner wrote.

With the update, Toner maintained a “Speculative Buy” rating on mCloud and $6.00 price target, which at the time of publication represented a projected one-year return of 388 per cent.