RKN:TSX Q1 2010 Results Down Again - Turning a corner or more turbulence to come?

This morning, Redknee reported Q1 2010 results. Revenue was reported at $11.4m, down 17% from Q1 2009 revenue of $14.2m and up by 13.5% sequentially from $10.4 m reported in Q4 2009. Gross margins were reported at 77%, slightly higher than previous year quarter reported at 76%. Actual gross profit was reported at $9.1m, down from $10.8 m reported for Q1 2009.

There was an improvement in EBITDA to $1.7m for Q1 2010 versus $0.9m reported for the previous year Q1. However, when removing the impact of foreign exchange from the equation, there was an EBITDA loss of $1.2m for this quarter compared to $1.4m in EBITDA reported for Q1 2009.

After some really good quarters, the company surprised the market with a weak Q4. It signaled at that time that there were some rough waters ahead as its market suffered through some ARPU compression and constrained CAPEX budgets, which RKN depends on to drive sales of its integrated subscriber billing, charging and personalization solutions to carriers worldwide. The good news is that, unlike Q4, the company was able to close two new contracts during Q1 2009. With these new EMEA regional sales, is the company turning the corner? It is too early to tell right now, and management continues to re-organize to streamline sales and operations, suggesting that it is preparing for more challenges during 2010.

Investors should see analysts begin to cut forecasts for the company with contract uncertainty ahead. On a multiple basis, the company is trading at 5.2x forward EV/EBITDA versus the TSX tech sector adjusted mean of 8.9x. Once analysts get done adjusting their forecasts downward, investors could see the current price range of between $1.10 and $1.20 as fair value relative to the rest of the sector. In reality, investors may become impatient, and the stock could re-test the lows of December after the company announced Q4 as some of them head for the exit. Notwithstanding, RKN is in the mobile infrastructure space, and despite short-term turbulence, is still well positioned to benefit as overall market conditions expand. Patient investors may see upside in the stock during H2 2010. The company has about $23.5m in the bank, so RKN may look to be active in M&A.

Redknee was one of the RES Free Thinking Top 5 Tech Picks last year, and had a really good run until it reported Q4. Even then, the stock was up by almost 200% from its lows at the beginning of 2009. RKN did not make the RES Free Thinking Top 10 Tech Pick for 10.

Disclosure: I do not own shares of RKN.

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