TDW - more details on upgrade Action Notes
May 11, 2015
81 of 102
Equity Research
Company Profile
Redknee is a leading global provider of
innovative communication software
products, solutions, and services, enabling
wireless and wireline operators to monetize
the value of each subscriber transaction
while personalizing the subscriber
experience to meet mainstream, niche, and
individual market segment requirements.
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RKN-T: Price
Please see the final pages of
this document for important
disclosure information.
Redknee Solutions Inc.
(RKN-T) C$4.50
Q2: Delivering on Margin and Working Capital Improvements
Event
With this note, we are assuming primary coverage of Redknee Solutions Inc.
Similar to the previous quarter, EBITDA of $10.5mm in Q2 (March) was
ahead (Street $8.4mm) despite a shortfall in revenue ($53.7mm vs. Street
$61.2mm). The stock was up 11% yesterday following these results. We
maintain our BUY rating, with a new $6.00 target price (up from $5.50).
Impact: POSITIVE
The near-term focus is the prof
itability of existing revenue.
Slower
revenue was largely caused by
currency headwinds and typical
lumpiness owing to longer sales cycl
es. Looking past this, the company
delivered the highest gross margin since acquiring NSN, which is
evidence that it is having success raising the profitability of the existing
revenue base. CFO rebounded into positive territory, addressing a key
concern for investors.
As the revenue base stabilizes and
focus shifts to growth, we believe
that Redknee could get re-rated.
Redknee expects a further 5–10%
erosion of the current $24.7mm recurring revenue base as the remaining
two NSN customers are rolled off the platform by year-end. Once
attention returns to driving growth through opportunities like upselling
the existing customer base (a $250mm opportunity) and in the IoT
market, we believe that the stock could command a higher valuation.
Recent restructuring is bearing fruit.
Operating expenses were down
8% sequentially (or $2.2mm) owing to a combination of Redknee’s
restructuring initiatives (reducing sub-contractor costs and R&D
functions) as well as the positive impact of currency. The company is
now tracking ahead of its “mid-teens” near-term EBITDA margin target.
Model changes: Cost cuts offset
top-line currency headwinds and
lower support revenue.
We now model $42.7mm in EBITDA (18%
margin) in FY2015 (up from $35.9mm). We model 20% in FY2016.
Stabilized operating model provides
a better platform for additional
M&A.
Redknee spoke to a “target ri
ch environment” and commented
that a more predictable profitability and cash flow model provides a
better foundation to evaluate additional deals.
TD Investment Conclusion
Our target price moves to $6.00 (from
$5.50) as a result
of our increased
EBITDA estimates and an unchanged 9x EV/forward EBITDA, one year out
(the year ending March 2017). This compares with a range of 7x–10x for
other billing/policy stocks