Redknee (RKN.TO) Strong Q3 - Outlook Encouraging

Tweet Last Night: As expected $TSE:RKN reported a strong quarter - 21% growth, 23% GM growth, 17.2% EBITDA margin, $0.01 EPS

Redknee reported
  • $14.5 million in sales for the quarter, up 21% from $11.9 million in previous quarter
  • Gross Margins of 79%, up 23% from 64% in previous quarter.
  • EBITDA of $2.5 million versus an EBITDA loss of $2.5 million in previous quarter
  • Earnings of $0.8 million or $0.01 EPS versus a loss of $3.5 million or a $0.06 loss per share.
  • Income from operations impacted by $1.1 million in FX loss for this quarter due to CAD$ strength.
During the conference call, Management revealed:
  • Current backlog is $28.3 million with 30% or approximately $8.5 million to be recognized in Q4, 2009.
  • It expects Gross Margins to normalize to between 73% and 75%
  • Recurring revenue as a percentage of total has increased from 33% to 38% due mostly to more maintenance renewals.
  • Breakeven revenue benchmark has declines from $58 m annualized to $51 m annualized over the past 6 quarters.
  • DSO has declined from 81 days to 75 days.
  • SG&A expenses as a percentage of revenue should decline as management leverages headcount. Expect EBITDA margins to increase from 17.2% over the next few quarters.
  • It plans to continue international expansion with Tier 1 market.
  • Begin focusing on Tier 2 and Tier 3 players in North America and Europe.
  • Expand into broadband triple play OSS.
The company plans to spend approximately 20% of sales on R&D for the foreseeable future, which is above industry averages for Canadian companies of similar size. In the long-term, this investment should create core competitive advantage. Even as management focuses on increasing recurring revenue as a percentage of sales, quarterly revenue is likely to remain somewhat lumpy into the future.

Management has hinted at future tuckunder acquisitions both in important local international markets, and in triple play OSS. It has stated that it would like to normalize cash on hand at between $17 and $20 million. Currently, the Company has $22.4 million, so there is budget for tuckunder acquisitions available.

The company continues to predict continued profitable growth into 2010 and 2011 despite continued currency risk related to the value of the Canadian dollar. Currency volatility continues to be Redknee's largest risk, and it may result in slower deployments as international clients attempt to manage costs related to currency fluctuations.

Earning for the first 9 months of 2009 are reported at $0.06 EPS

Fundamentally, the stock is trading in the 10x EV/EBITDA range on a conservative FYE estimate. There is probably room for this stock to continue to ascend on a comparative basis. Notwithstanding the general over valuation of the current equity market, RKN and its peers such as BWC are profitable with international presence in high growth market sectors and strong balance sheets. A good spot to be for stock pickers.

Disclosure: own BWC, do not own RKN.

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