The risk-to-return on NTG Clarity Networks is incredible, Beacon Securities says

Beacon Securities analyst Doug Cooper maintained a “Buy” rating and $5.00 target for NTG Clarity Networks (NTG Clarity Networks Stock Quote, Chart, News, Analysts, Financials TSXV:NCI) in an Aug. 28 report following the company’s second-quarter fiscal 2025 results, saying the company has the infrastructure in place to drive toward $100-million in annual revenue.

NTG, a Canadian software and professional services firm serving telecom and network providers in Canada and the Middle East, reported Q2 revenue of $18.9-million, up 51% year over year but down 4% sequentially. Cooper said the quarterly decline was driven by currency effects, noting the Canadian dollar strengthened 5% against the U.S. dollar; on a constant-currency basis, revenue would have risen 2%.

Revenue from NTGapps, the company’s proprietary software suite, reached about $4-million in the quarter, up from $1.8-million in Q1 and essentially nil a year earlier. Gross margin expanded to 38.6% from 35.2% a year ago and 34.8% in Q1, reflecting the higher software contribution. “We anticipate gross margin could move north of 40% as SaaS revenue continues to gain in importance,” Cooper said.

EBITDA was $2.8-million, or 15% of revenue, flat on both a year-over-year and sequential basis. Cooper attributed this to a sharp increase in G&A expenses, which rose to 28% of revenue from 20.1% in Q1 and 12% in Q2 2024, as the company added about 100 employees in advance of expected growth. He said EBITDA and net income should improve as the new hires are deployed more fully.

Pre-tax income was $1.3-million, held back by a $1.2-million foreign exchange expense. Adjusting for the FX impact, pre-tax earnings would have been $2.5-million, showing what Cooper described as strong operating leverage. Subsequent to quarter-end, NTG raised about $9-million at $2.20 per share, leaving it with more than $10-million in cash and net cash positive, with working capital of roughly $25-million. Accounts receivable stood at $23-million, with the proportion outstanding more than 90 days down to 6.2% from over 13% two quarters ago.

“With approximately 1,300 employees, we believe NTG has the ‘assets’ in place to drive $100-million in revenue,” Cooper said. “At 40-per-cent-plus gross margins, that level of revenue could generate $20-million in EBITDA and EPS of about $0.30, putting the stock at 4x EBITDA and 6x earnings — valuations that would be attractive to other companies looking for a foothold in the region. As such, we believe the risk-return is incredible.”

Looking ahead, Cooper forecasts NTG will generate Adjusted EBITDA of $13.7-million on $80.3-million in revenue in fiscal 2025, improving to $16.5-million on $94.9-million in fiscal 2026.

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