Martello Technologies is heading higher, says Paradigm

Fans of Martello Technologies (Martell Technologies Group Stock Quote, Charts, News, Analysts, Financials TSXV:MTLO) have had little to cheer about lately, as far as the company’s share price goes, but after looking at new quarterly earnings from the Ottawa-based SaaS provider, Paradigm Capital analyst Daniel Rosenberg is sticking with a “Speculative Buy” rating on the stock. Rosenberg delivered a report to clients on Wednesday where he said Martello could make an interesting takeout target for the right company.

Martello, which has performance analytics software, IT operations analytics and digital experience monitoring Software-as-a-Service, announced on Tuesday its third quarter fiscal 2023 financials for the period ended December 31, 2022. The company reported revenue down nine per cent year-over-year to $4.1 million, a net loss of $20.2 million and an adjusted EBITDA loss of $168K, which compared to an EBITDA loss of $777K a year earlier. 

Martello’s topline was impacted by the loss of revenue from a large legacy client, while earnings felt the sting of a $19 million impairment of goodwill and intangible assets hit, related to the acquisition of Savision and GSX. More recently, Martello announced $2.4 million in financing at $0.05 per share, to be paid over four equal tranches with the final payment due in June, 2023. 

Martello also announced the resignation of Co-Chairman Bruce Linton and directors Jennifer Camelon and Michael Michalyshyn, as part of the company’s aim to streamline its business and focus on the Microsoft Teams market.

“With more than 280 million monthly active Teams users globally, and the number continuing to grow fast, Martello has a unique opportunity as a Microsoft Preferred Solution to capture a significant share of this global market, and at the right time,” said Martello Chairman Terence Matthews in a press release.

Rosenberg said the fiscal Q3 revenue of $4.1 million arrived in-line with his $4.1 million estimate, while the $0.2 million adjusted EBITDA loss was greater than his forecast at $0.0 million.

Rosenberg said he has made adjustments to his estimates to account for the recent financing rounds, calling now for full fiscal 2023 revenue and adjusted EBITDA of $16.2 million and negative $1.6 million, respectively, and for fiscal 2024 revenue and EBITDA of $16.3 million and positive $0.2 million, respectively.

“The company has technology of value but has been challenged to find growth or sufficient scale. We think it could make an interesting acquisition target at some point for sellers of cybersecurity software and network security services,” Rosenberg said.

“Martello Technologies is a leader in the emerging Digital Experience Monitoring (DEM) market, which Gartner pegs at ~US$650–US$850 million,” he wrote. “Martello has an 11-year history as the provider of analytics software for Mitel’s phone systems. Its past acquisition of GSX expands the company’s addressable market into the large and growing Microsoft Office 365 environment and provides cross-selling opportunities.”

Rosenberg maintained a 12-month target of $0.05 per share, which at press time represented a projected return of 67 per cent.

“We view Martello as one of the few Canadian small-cap SaaS investments available and an attractive way for investors to gain exposure to the emerging Digital Experience Monitoring space.